U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
--------------------------------------------------------------------------------
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
CYBERCARE, INC.
(Exact name of registrant as specified in its charter)
Commission file number: 0-20356
FLORIDA 65-0158479
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 QUANTUM LAKES DRIVE, SUITE 1000
BOYNTON BEACH, FLORIDA 33426
(Address of Principal Executive Office)
(561) 742-5000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Exchange Act:
None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Common Stock
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes /X/ No / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
Issuer's total revenues for the 12 months ended December 31, 2001 were
approximately $18,241,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sales price on the Nasdaq National Market on
April 5, 2002 was $19,403,549. As of April 5, 2002 registrant had 69,433,357
shares of common stock outstanding.
TABLE OF CONTENTS
ITEMS PAGE
PART I
ITEM 1. DESCRIPTION OF BUSINESS.....................................................2
ITEM 2. DESCRIPTION OF PROPERTY....................................................17
ITEM 3. LEGAL PROCEEDINGS..........................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS....................................................................18
ITEM 6. SELECTED FINANCIAL DATA....................................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .......................................21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................32
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS..........................................32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................32
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT .......................................................................32
ITEM 11. EXECUTIVE COMPENSATION.....................................................34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.............................................................40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................42
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K...........................................42
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CyberCare, Inc. was incorporated in September 1989 in the State of
Florida. Our principal executive offices are located at 2500 Quantum Lakes
Drive, Suite 1000, Boynton Beach, Florida 33426, and our telephone number is
(561) 742-5000. The Company consists of the following three separate and
distinct businesses:
Pharmacy business whose operations primarily support assisted living and
similar long-term care facilities;
Physical therapy and rehabilitation business focuses on providing
occupational, physical and speech therapy services; and
Technology business focuses on the development and commercialization of
patented products and services used in remote monitoring, care and
communication between patients, caregivers and other people included in
the healthcare continuum.
Our technology division is a tele-health solutions company improving the
delivery of care through its products and services. Tele-health involves the
remote monitoring of patients and delivery of care via specially designed
hardware and software, through standard telephone lines and/or broadband
connectivity, either directly or in a network-based environment over the
Internet. Product offerings enable health plans, home health, disease management
agencies, employers, hospital systems, HMOs, insurers and other risk bearing
organizations to better manage the cost of care through wellness and disease
management programs.
We create an online interactive community that incorporates all members
of the care team in the healthcare delivery process, resulting in cost
reductions and the improvement in the quality of patient care. Utilizing
patented technology for the remote monitoring and real-time interactive
communication between patients and caregivers, the CyberCare System-TM- allows
for effective and efficient electronic disease management, including automatic
data collection, case management, and personal interaction. The CyberCare
System-TM-, which consists of the Electronic HouseCall-Registered Trademark-
family of products ("EHC-TM-"), the CyberCare 24 Network-TM-, and the
CyberHealth Manager-TM-, provides a complete package of tele-health products and
services for patients, caregivers and payors. We are committed to quality and
our solutions are global in nature. In addition to our domestic sales efforts,
we intend to market our products and services in foreign markets via a series of
licensing arrangements and joint venture partnerships with local organizations
that understand local health care delivery issues and which have a strong local
presence, appropriate infrastructure and relationships with industry and
government.
Our proprietary software application is the Electronic HouseCall
-Registered Trademark- application that runs on the EHC-TM- patient and provider
Units that have videoconferencing and medical measurement capabilities. This
software application was originally developed at Georgia Tech and further
modified by us. The software application implements the patented technology that
is licensed to us from Georgia Tech and the Medical College of Georgia. The
patent (U.S. Patent No. 5,987,519 titled "Telemedicine system using voice video
and data encapsulation and de-encapsulation for communicating medical
information between central monitoring stations and remote patient monitoring
stations") secures all telemedicine applications that use packet-based
technology to simultaneously exchange voice, video, and medical data. Also
incorporated in the software application is the technology secured by U.S.
Patent No. 6,112,224 titled "Patient monitoring station using a single interrupt
resource to support multiple measurement devices" as well as technology secured
by multiple patents pending.
Our CyberCare System is comprised of monitoring devices ("Units") and
peripheral medical devices designed for use by patients and Units designed for
use by care providers. Units and peripherals determined to be medical devices
have received marketing approval by the United States Food and Drug
Administration ("FDA") as described below. Other Units are not subject to FDA
regulatory approval or, because they have been determined to be line extensions
of a "cleared" Unit, do not require additional regulatory approval.
2
PATIENT UNITS
EHC100: This Unit is a general-purpose telecommunications device for use by
patients and is not regulated by the FDA. It uses standard telephone lines and
is intended for use by an unassisted patient in his or her residence. The Unit
allows the patient to use certain peripheral medical devices and take their own
vital signs measurements, such as blood pressure, blood glucose level and body
weight. The Unit then transmits the measurements to a database that resides on
the CyberCare 24 Network-TM- for review, analysis and appropriate action by a
care provider.
EHC1500: The EHC1500 is a variation of the EHC100 that uses a pocket PC
platform, thereby allowing greater portability and flexibility of use. It can be
configured to handle up to three peripheral medical devices, including a blood
pressure cuff, weight scale and blood glucose meter. It communicates and
transmits the vital signs data through the CyberCare 24 Network using a standard
telephone line or by wireless connection.
EHC400: This patient Unit has received FDA marketing clearance and uses
broadband telecommunication services to connect to the CyberCare 24 Network. It
allows the patient to interact with care providers (such as a physician, nurse,
physician assistant, care manager, etc.) situated in another location in a
"virtual housecall" through an audio-visual videoconference, and allows the
patient, using various peripheral medical devices, to collect and transmit his
or her own medical measurements (such as blood pressure, using a
sphygmomanometer; temperature, using an electronic oral thermometer; blood
oxygen saturation and pulse, using a pulse oximeter; blood glucose (sugar)
level, using a glucometer; body weight, using an electronic weight scale; and/or
heart, lung and bowel sounds, using an electronic stethoscope) through the
CyberCare 24 Network for immediate or later review by care providers.
EHC300: This patient Unit is similar to the EHC400, but only permits
audio-visual videoconferencing without the addition of peripheral medical
devices or vital sign data collection. It communicates with care provider Units
via the CyberCare 24 Network using standard telephone lines and has the
capability to engage in multipoint conferences with other Units through the
CyberCare 24 Network.
EHC350: Similar to the EHC400, this patient Unit combines the audio-visual
videoconferencing capabilities of the EHC300 with peripheral medical device
availability and patient vital signs data collection through a special module to
accommodate the peripheral devices. The Model 350 is equipped with a module for
accommodating the connection of peripheral devices and communicates and
transmits data through the CyberCare 24 Network using standard telephone lines.
EHC2000: This is a more advanced, compact and lightweight version of the EHC400
which supports the use of peripheral medical devices including "plug and play"
USB ports. It also features a magnetic card reader and can use either standard
analog telephone lines or broadband telecommunications service to communicate
and transmit data via the CyberCare 24 Network.
EHC2050: This patient Unit is a variation of the EHC 2000 and uses standard
telephone lines to communicate and transmit data either using the routed
architecture of the CyberCare 24 Network or directly (in a "point-to-point"
manner) to a care provider using either an EHC650 or EHC1650 care provider Unit.
CARE PROVIDER UNITS
EHC600: The EHC600 care provider workstation Unit has received FDA marketing
clearance and uses broadband telecommunications service to allow care providers
to conduct a "virtual housecall" and interact with a remotely situated patient
in an audio-visual videoconference. Incorporating the Cyber HealthManager
software, this Unit also allows care providers to initiate collection of certain
patient vital signs measurements during a "virtual housecall" as well as review
patient vital sign measurements and snapshot images (such as for wound care
treatment) transmitted by a patient Unit through the CyberCare 24 Network. This
Unit enables the care provider to assess patient status, analyze patient data
and develop reports through its various software capabilities.
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EHC650: This Unit has the same features as the EHC600, except that it
communicates directly with an EHC2050 patient Unit (in a "point-to-point"
manner) rather than through the routed architecture of the CyberCare 24 Network.
EHC1600: This care provider Unit is a laptop version of the EHC600 workstation,
but uses either standard analog telephone lines or broadband telecommunications
service to communicate via the CyberCare 24 Network.
EHC1650: This model is similar to the EHC1600 except that it utilizes standard
analog telephone lines to communicate directly (in a "point-to-point" manner)
with patient Units having videoconferencing capabilities. The EHC1650 uses a
stand-alone database and can be connected with the CyberCare 24 Network as
needed for periodic software and database updates.
EHC1625: This care provider Unit is a scaled-down, hand-held version of the
EHC600 and uses pocket PC platform. It is a care management device that enables
the care provider to remotely monitor patient vital sign data transmitted from a
patient Unit. It does not permit direct interaction or video conferencing with a
patient. It is web-enabled and operates either in a wireless environment or
using standard analog telephone lines to communicate via the CyberCare 24
Network.
EHC3000 CARE MANAGEMENT SOFTWARE: This is a web-enabled software platform that
allows the care provider access, via the internet and a secure home page, to the
data on the CyberCare 24 Network database transmitted from patient Units. It
operates on any computer with internet access that utilizes an industry standard
browser and can provide electronic mail notifications to care providers
regarding a patient's condition based on programmable ranges and/or thresholds
determined by the care provider.
PERIPHERAL MEDICAL DEVICES AND SOFTWARE APPLICATIONS
A number of peripheral medical devices are used in connection with
certain EHC patient Units, some of which we obtain commercially from medical
device suppliers and others which we have developed ourselves. We have developed
certain medical devices and software applications as principle components of the
CyberCare System and have received FDA marketing clearance on such items as
follows:
Weight Scale - FDA marketing clearance obtained.
Blood Glucose Meter - FDA marketing clearance obtained.
Electronic Stethoscope - FDA marketing clearance obtained.
Blood Pressure Cuff (Sphygmomanometer) - FDA marketing clearance
obtained.
Pulse Oximeter - FDA marketing clearance obtained.
Electronic Oral Thermometer - FDA marketing clearance obtained.
Spirometer - Application for FDA marketing clearance in progress.
Medication Compliance Option - Application for FDA marketing clearance
in progress.
The CyberCare System has a very flexible configuration and system design,
allowing the EHC products to meet various application requirements and
conditions for different market segments. The products and services may be
combined in a fully network-based system or in a point-to-point configuration.
In addition to workstation type Units, the CyberCare System includes web-based,
mobile and hand-held EHC Units for both the caregiver and the patient so they
are not constrained by the boundaries of home, office or expensive stand alone
equipment. All the EHC products conform to industry standards and may be
integrated into customer workflow and data management operating systems.
Significant attention in the design process has been devoted to security,
confidentiality and privacy, as well as to intended target markets. The
CyberCare System helps the caregiver to track clinical outcomes and improvements
in medication and treatment compliance.
The CyberCare System has been designed to be implemented in
fee-for-service, case rate, episodic rate or capitation environments.
4
OUR OTHER BUSINESSES
We provide physical, occupational, speech therapy and pain rehabilitation
services in clinics currently owned and/or operated. We currently employ
approximately 153 people in this segment. On average, each physical therapy
clinic typically has a staff of three, including a fully licensed therapist, a
licensed therapy assistant and an administrative secretary/rehabilitation aide.
We develop rehabilitation clinics within specific geographic locations
throughout Florida that we believe will create synergies and operating
efficiencies and satisfy the cost containment requirements of significant payor
sources. Our rehabilitation services include specialty programs, like pain
management, coupled with traditional services, such as comprehensive
rehabilitation.
Our Pharmacy is a pharmacy employing approximately 48 individuals with
its principal place of business in Lakeland, Florida. Through this segment, we
provide unit-dosed medications to over 4,000 residents in 94 assisted-living
facilities across central and west Florida by delivering directly to the
facilities serviced. Our Pharmacy also has permits to dispense to patients in
other states as a non-resident pharmacy.
We are currently evaluating the above two businesses for growth,
profitability and cash flow. Upon the completion of the evaluation, we will make
a determination whether to maintain these businesses as part of the consolidated
group or, if we receive an offer to purchase these businesses which is in the
best interest of our shareholders, we will sell the businesses.
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND A SUBSTANTIAL ACCUMULATED DEFICIT AND WE
MAY NEVER REACH PROFITABILITY
To date, we have been unable to generate revenue sufficient to be
profitable on a consistent basis. Consequently, we have sustained substantial
losses. Net losses for the years ended December 31, 2001, 2000 and 1999 were
$44,916,000, $28,698,000 and $10,808,000, respectively. Our accumulated
deficits as of December 31, 2001 and 2000 were $112,066,000 and $67,150,000,
respectively. Our products and services may never achieve the commercial
acceptance necessary to achieve the level of revenues needed to be profitable
in the future or, if profitability is achieved, that it will be sustained.
WE WILL NEED TO OBTAIN ADDITIONAL FINANCING AND WE CANNOT BE CERTAIN THAT
ADDITIONAL FINANCING WILL BE AVAILABLE WHEN NEEDED OR ON TERMS FAVORABLE TO US
OR OUR STOCKHOLDERS
Our future capital requirements will depend on many factors, including
but not limited to:
- the market acceptance of the CyberCare System;
- the levels of promotion and marketing required to attain a
competitive position in the marketplace;
- the extent to which we invest in new technology and improvements
of existing technology; and
- the response of competitors to our introduction of the CyberCare
System and other new products and services.
To the extent that funds generated through the exercise of stock options
and warrants, sale of common shares under our private equity line agreement with
Strategic Investment Management, S.A., together with existing resources, are
insufficient to fund our activities over the short and long term, we will need
to raise additional funds through equity or debt financing or from other
sources. The sale of additional equity or convertible debt may result in
additional dilution to our stockholders. To the extent that we rely upon debt
financing, we will incur the obligation to repay the funds borrowed with
interest and may become subject to covenants and restrictions that restrict
operating flexibility. Failure to
5
obtain necessary financing could have a material adverse effect on our business,
financial condition or results of operations.
WE MAY NOT BE ABLE TO PROTECT PATENTS AND PROPRIETARY TECHNOLOGY, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our ability to compete effectively in the tele-health industry will
depend on our success in developing and marketing our products and services
and/or acquiring other suitable businesses and protecting our proprietary
technology both in the United States and abroad. We currently have a license for
certain patents and have several patents pending. We intend to file additional
patent applications that we deem to be economically beneficial. If we are not
successful in obtaining and defending patents or demonstrating that our
technology is proprietary, we will have limited protection against those who
might copy our technology. We may incur substantial costs in defending any
patent or license infringement suits or in asserting any patent or license
rights, including those granted by third parties. The expenditure involved in
asserting, obtaining or defending these intellectual property rights may be more
than we can afford.
Although we have and will continue to enter into confidentiality,
covenant not to compete and invention agreements with our employees,
consultants, partners and acquisition targets, such agreements may not be
honored or they may not be able to adequately protect our rights to our
non-patented trade secrets and know-how.
THIRD PARTIES MAY CLAIM THAT WE HAVE BREACHED THEIR INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD RESULT IN SIGNIFICANT ADDITIONAL COSTS OR PREVENT US FROM
PROVIDING ALL OF OUR SERVICES
Certain products, which are components of the CyberCare System, were the
subject of a patent infringement complaint filed March 2, 2001 by the Cybernet
Systems Corporation ("Cybernet") in the United States District Court for the
Eastern District of Michigan. The complaint alleged that at least our EHC 600
Provider Units, EHC 500 and EHC 400 Patient Units, and EHC 200 Videoconferencing
Unit infringed Cybernet's U.S. Patent No. 6,050,940, issued April 18, 2000, for
"General-Purpose Medical Instrumentation". The complaint was never served on us
and the lawsuit was dismissed by court order on July 5, 2001 based on the
plaintiff's failure to prosecute the case. Had the lawsuit been pursued, we
strongly believe we have good and valid defenses to Cybernet's charges of
infringement, including, but not limited to, that each of the accused products
do not infringe any of the Cybernet patent claims. We are not aware of other
claims or threats of claims regarding patent infringement or alleged
infringement.
Third parties may bring claims of copyright or trademark infringement,
patent infringement or misappropriation of creative ideas or formats against us
with respect to content that we distribute or our technology or marketing
techniques and terminology. Claims of this kind, even if without merit, could be
time-consuming to defend, result in costly litigation, divert management
attention, require us to enter into costly royalty or licensing arrangements or
prevent us from distributing certain content or utilizing important
technologies, ideas or formats.
Defending and prosecuting intellectual property suits, interference
proceedings and related legal and administrative proceedings are costly,
time-consuming and divert the attention of technical and management personnel.
Litigation may be necessary to enforce our patents or defend our patent rights,
to protect our trade secrets or know-how or to determine the enforceability,
scope and validity of the proprietary rights of others. If the outcome of any
such litigation or interference proceedings is adverse to us, it could subject
us to significant liabilities to third parties or require us to license disputed
rights from third parties or cease using such technology, which would have a
material adverse effect on our business, financial condition, results of
operations and future growth prospects. Patent and intellectual property
disputes in the medical device area have often been settled through licensing or
similar arrangements, which can include ongoing royalties. We may not obtain the
necessary licenses on satisfactory terms, if at all.
6
CHANGES IN PAYMENT FOR MEDICAL SERVICES COULD HARM OUR BUSINESS
We believe that trends in cost containment in the health care industry
will continue to result in a reduction in per-patient revenues which may impact
our health services segments. The federal government has implemented, through
the Medicare program, a payment methodology for physician services. This
methodology is a fee schedule that, except for certain geographical and other
adjustments, pays similarly situated physicians the same amount for the same
services. The schedule is adjusted each year and is subject to increases or
decreases at the discretion of Congress. Reduced operating margins may not be
recouped by us through cost reductions, increased volume, introduction of
additional procedures or otherwise. Rates paid by non-governmental insurers,
including those that provide Medicare supplemental insurance, are based on
established physician, ambulatory surgery center and hospital charges, and are
generally higher than Medicare payment rates. A change in the makeup of the
patients that we serve that results in a decrease in patients covered by private
insurance or a shift in private pay payment structures could adversely affect
our business, financial condition or results of operations.
CERTAIN PAYMENTS TO OUR PT&R SUBSIDIARY HAVE BEEN HELD IN ESCROW
Our Physical Therapy and Rehabilitation subsidiary ("PT&R") received a
letter from the Center for Medicare and Medicaid Services ("CMS") and is
intermediary in April 2001 notifying it of the suspension of Medicare payments.
CMS alleged that certain patient complaints, which constituted less than 1% of
PT&R's Medicare patients, and other alleged regulatory non-compliance, justified
the payment suspension. During the suspension, the Medicare program continued to
process PT&R's claims, but held payment in escrow. In August 2001, the
suspension was lifted and payment for processed claims was released, although
approximately $1,114,548 remains held in escrow, pending further review. The
Company has learned that CMS has completed its review and a formal determination
is expected shortly, which is anticipated to include a release of the escrowed
amount as offset by an amount for denied claims. The denied claims may be
appealed through the CMS administrative appeal process. As of December 31,
2001, the Company has recorded an allowance for uncollectible accounts in the
amount of $500,000 against the balance being held.
WE ARE THE SUBJECT OF SECURITIES CLASS ACTION LITIGATION
We are currently the subject of a consolidated class action lawsuit
against us and certain of our executive officers alleging violations of
federal securities laws. The action seeks unspecified damages and costs.
Securities litigation could result in substantial costs to us and could
divert management's attention and resources away from our operations and
development. Although we have insurance coverage for this consolidated action
which we believe will be adequate to cover defense costs, an exception or
exclusion to coverage may apply or such coverage may not in fact cover all
defense costs. We believe that we have meritorious defenses to these suits,
but we may not prevail in this litigation. Since this consolidated action is
in the early stages, we cannot predict the outcome of this litigation or
determine the full potential impact it may have on our liquidity or financial
condition. We, and our executives, believe the claims made in the complaint
lack merit.
We are engaged, as disclosed herein, in other ongoing litigation. We are
unable to estimate the financial impact on the Company's financial statements of
other ongoing litigation.
WE HAVE LIMITED EXPERIENCE CONDUCTING OPERATIONS INTERNATIONALLY, WHICH MAY MAKE
OVERSEAS EXPANSION MORE DIFFICULT AND COSTLY
We have begun the process of initiating business network operations in
several foreign countries. We are subject to differing laws, regulations and
business cultures which may adversely impact our business. We may also be
exposed to economic and political instability and international unrest. Although
we have and will continue to enter into agreements with our partners and
customers that attempt to minimize these risks, such agreements may not be
honored or we may not be able to adequately protect our interests.
We plan to expand our international operations in the future. There are
many barriers and risks to competing successfully in the international
marketplace, including:
7
- Costs of customizing products for foreign countries;
- Foreign currency risks;
- Dependence on local vendors;
- Compliance with multiple, conflicting and changing laws, and
regulations and policies;
- Longer sales cycles;
- Import and export restrictions and tariffs.
As a result of these competitive barriers to entry and risks, we may not
be able to successfully market, sell and deliver our products and services in
international markets.
We may engage in hedging transactions in the future to manage or reduce
our foreign exchange risk. However, our attempts to manage our foreign currency
exchange risk may not be successful and, as a result, our net earnings could be
negatively affected by any unfavorable fluctuations in foreign currency exchange
rates.
Our foreign operations could also be subject to unexpected changes in
regulatory requirements, tariffs, and other market barriers and political and
economic instability in the countries where we operate. Due to our foreign
operations, we could be subject to such factors in the future and the impact of
any such events that may occur in the future could subject us to additional
costs or loss of sales, which could negatively affect our operating results.
THE NATURE OF OUR BUSINESS EXPOSES US TO PROFESSIONAL AND PRODUCT LIABILITY
CLAIMS, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR OPERATIONS
Our business and technology exposes us to potential professional and
product liability risks which are inherent to such business and products,
including the risks associated with providing tele-health and disease management
products and services through a virtual private network which is reliant upon
telecommunications pipelines and connections provided by third parties which
may, from time to time, experience interruption of service. We carry reasonably
adequate insurance to protect against professional and product liability,
including errors and omissions in our technology and software design,
unauthorized access to our network and loss or interruption of service or system
functions, which could materially adversely impact our business and operations.
WE MAY LOSE REVENUE OR INCUR ADDITIONAL COSTS BECAUSE OF SYSTEM FAILURE
Any system failure that causes interruptions in our operations may have
an adverse effect on our business, financial condition or results of operations.
Our services are dependent on our own and other companies' abilities to
successfully integrate technologies and equipment. In connecting with other
companies' equipment we take the risk of not being able to provide service due
to telecommunications failure. There is also the risk that our equipment may
malfunction or that we could make an error, which may negatively affect our
customers' service. Our hardware and other equipment may also suffer damage from
natural disasters and other catastrophic events, such as loss of power and
telecommunications failures. We have taken a number of steps to prevent our
service from being affected by natural disasters, including development of
redundant systems. Nevertheless, such steps and redundancies may not prevent our
system from becoming disabled in the event of a hurricane, power outage or
otherwise. The failure of our system resulting from the effects of a natural or
man-made disaster could have an adverse effect on our relationship with our
customers and our business, financial condition and results of operations.
THE LOSS OF CERTAIN MEMBERS OF OUR MANAGEMENT TEAM COULD MATERIALLY ADVERSELY
AFFECT US
We are dependent, to a significant extent, on the continued efforts and
abilities of members of our management team, the majority of which have
employment contracts. The Company is the owner of $1,000,000 key man life
insurance policies on the lives of our President and Executive Vice President.
We have had a high degree of success attracting key personnel. Currently, we are
not aware of any key personnel who plan to retire or leave the Company in the
near future. Our former Chairman and CEO, Michael F. Morrell and former
Corporate Secretary, Linda Moore
8
resigned in February 2002. If we were to lose the services of any of our key
employees without obtaining qualified replacements, our business could be
materially adversely affected.
We believe that our success will also depend upon our ability to hire,
train and retain other highly skilled personnel. We compete in a new market and
there are a limited number of people with skills necessary to provide the
services our clients demand. Competition for quality personnel is intense. We
cannot be sure that we will be successful in hiring, assimilating or retaining
the necessary personnel, and our failure to do so could affect our business,
financial condition and results of operations.
WE COMPETE WITH A NUMBER OF ESTABLISHED COMPANIES, SOME OF WHICH HAVE
SIGNIFICANTLY GREATER FINANCIAL, TECHNOLOGICAL AND MARKETING RESOURCES THAN WE
DO, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH THESE COMPANIES
The tele-health solutions business is relatively new and evolving. We
compete with companies in the tele-health and monitoring business and from other
industries. The health care industry in general and the market for medical
ancillary services specifically are highly competitive. We compete with
ancillary services companies that are larger and have greater financial
resources than we do. We face competition from companies that provide
tele-health solutions, most of which are in the early stages of development.
We believe that we compete effectively by providing superior technology
and tele-health solutions and more personalized care to the patients and
customers we serve. We believe the primary competitors for EHC products are
small, privately-held companies, none of which have established a major market
position as of this time. Some larger companies, such as Panasonic and Agilent,
have also recently announced initiatives in this market. Key differentiating
factors between us and our competitors in this segment lie primarily in our
tele-health solutions architecture that utilizes our patented technology and our
developed software applications.
RISKS RELATED TO OUR INDUSTRY
WE CANNOT GUARANTEE YOU THAT OUR PRODUCTS WILL BE FULLY DEVELOPED OR ACCEPTED BY
THE HEALTH CARE INDUSTRY
Payors, physicians, medical providers or the medical community in general
may not accept and utilize our products and services. The extent, and the rate
at which, our products achieve market acceptance and penetration will depend on
many variables, including the establishment and demonstration in the medical
insurance and payor communities of the clinical safety, efficacy and
cost-effectiveness of our products and services, the advantage of these products
over existing technology, third-party reimbursement practices and our
manufacturing, quality control, marketing and sales efforts. There can be no
assurance that similar risks will not confront any other products and services
we develop in the future. Failure of our products and services to gain market
acceptance would have a material adverse effect on our business, financial
condition, and results of operations.
WE ARE SUBJECT TO A SIGNIFICANT NUMBER OF HEALTH CARE INDUSTRY REGULATIONS AND
RELATED REGULATIONS, THE FAILURE TO COMPLY WITH, COULD MATERIALLY ADVERSELY
AFFECT OUR OPERATIONS
We are subject to substantial potential liability resulting from a
variety of possible causes, including violation of numerous health care laws,
malpractice and product liability. Many of the health care laws to which we are
subject are broad in scope and difficult to interpret. If any actions or
lawsuits are brought against us in the future, such actions or lawsuits could
have a materially adverse effect on us. Violations of the state and federal
anti-kick back or self-referral laws and regulations could result in substantial
civil and/or criminal penalties and/or administrative sanctions for the
individuals or entities, including exclusion from participation in the Medicare
and Medicaid programs, as well as the suspension or revocation of professional
licensure. Such sanctions, if applied to us or any of our employees, could
result in significant loss of reimbursement and could have a material adverse
effect on us.
9
We attempt to minimize our potential liability through implementation of
and adherence to compliance policies and procedures, effective supervision and
personnel recruitment procedures. We also carry a variety of insurance policies
including policies insuring against certain negligent acts. Insurance policies
may not adequately cover our losses resulting from such potential liability and
we may be unable to continue to qualify for, or be able to afford or obtain such
insurance in the future.
The Health Insurance Portability and Accountability Act of 1996
("HIPAA"), among other things, mandates administrative simplification of
electronic data interchanges of health information, including standardizing
transactions, establishing uniform health care provider, payer and employer
identifiers and seeking protections for confidentiality and security of
patient data. Final regulations governing healthcare transaction security
were published in the August 17, 2000 FEDERAL REGISTER, and will become
effective for most entities in or after October 2002. Final regulations
governing privacy and confidentiality of individually identifiable health
information were published in the December 20, 2000 FEDERAL REGISTER, and
will become effective for most entities in or after February 2003. Many of
the provisions of HIPAA do not directly apply to our technology business
since it is not included in the types of entities to which HIPAA applies.
However, because we may be considered a business associate of a covered
entity, and because the implementation of our EHC-TM- system for our
customers necessitates that we have interaction with patient users of the
system, we will nonetheless have to comply with certain aspects of the HIPAA
regulations in order to assure compliance by our customers. HIPAA also
applies to our physical therapy and rehabilitation segment, as well as our
pharmacy segment. We are proceeding to assess where our current systems
diverge from HIPAA's privacy and security requirements and to implement
protocols and procedures that will bring such systems and areas into
compliance before the deadlines identified in the final regulations. We are
unable at this time to assess the cost of implementation of the
administrative simplification requirements of HIPAA that are applicable to
our business.
RISK FACTORS ASSOCIATED WITH CONTRACTS AND SUB-CONTRACTS WITH THE U.S.
GOVERNMENT
It is our goal to introduce the CyberCare System for use by agencies or
authorities of the federal and state governments (such as the U.S. Veterans
Administration, Medicare, Medicaid, TRICARE, or other federally or state funded
health care programs) and we are currently engaged in the administration of
pilot programs for our CyberCare System with certain of these agencies and
authorities. Accordingly, a portion of our revenue may be derived from contracts
or subcontracts funded by the U.S. government or other state or local
governments. Therefore, our financial performance may be adversely affected by
changing government (federal, state or local) procurement practices and policies
as well as declines in government spending and funding. The factors that could
have a material adverse effect on our ability to win new contracts with the
federal, state or local governments, or retain existing contracts, include the
following: budgetary constraints; changes in government funding levels,
programs, policies or requirements; technological developments; the adoption of
new laws or regulations; and general economic conditions.
NEW LEGISLATIVE DEVELOPMENTS COULD RESULT IN FINANCIAL HARDSHIP
Legislation regarding health care reform may be introduced in the future
by Congress or state legislatures. Any such reforms at the federal or state
level could significantly alter patient-provider relationships. State and
federal agency rule-making addressing these issues is also expected. No
predictions can be made as to whether future health care reform legislation,
similar legislation or rule-making will be enacted or, if enacted, its effect on
us. Any federal or state legislation prohibiting investment interests in, or
contracting with, us by physicians or health care providers for which there is
no statutory exception or safe harbor would have a material adverse effect on
our business, financial condition and results of operations.
RISKS RELATED TO OUR STOCK
SUBSTANTIALLY ALL OF OUR SHARES ARE ELIGIBLE FOR RESALE, WHICH MAY HAVE A
DEPRESSIVE EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK
10
As of December 31, 2001, we had 67,827,992 shares of Common Stock
outstanding, of which substantially all can be sold under an effective
registration statement or under Rule 144. Under Rule 144, a person who has held
restricted securities for a period of one year may sell a limited number of
shares to the public in ordinary brokerage transactions. Sales under Rule 144
may have a depressive effect on the market price of our Common Stock due to the
potential increased number of publicly held securities. The timing and amount of
sales of Common Stock that are currently eligible to be resold pursuant to Rule
144 could have a depressive effect on the future market price of our Common
Stock.
THE ISSUANCE OF SHARES OF COMMON STOCK UNDER A PRIVATE EQUITY LINE AGREEMENT
WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS
Pursuant to the terms of a private equity line agreement, we may issue up
to $30,000,000 of shares of our Common Stock to Strategic Investment Management,
S.A. at a price equal to approximately 85% of the market price of the Common
Stock. By raising additional funds and issuing additional common shares under
the private equity line, our stockholders may experience dilution and various
investors engaging in short selling activities might also affect the market
price of our common shares. As a result of a decrease in our common stock price,
we could face de-listing, a damaged capital structure and a reduction in the
availability of additional financing.
The Company has the ability to draw down funds from the private equity
line subject to the terms and conditions of the equity line agreement. The
amount that the Company will be able to draw down is dependent on the Company's
stock price and volume. If the stock price decreases, this will require the
Company to issue more shares (and vice versa) and if the trading volume
decreases, then the amount of shares to be put will be minimized, thus limiting
the amount of funding (and vice versa).
Due to our current stock price, the NASDAQ Stock Market Inc. ("Nasdaq")
has notified us that on February 20, 2002, the price of our common stock had
closed for the previous consecutive 30 days below the minimum $1.00 per share
requirement under its Marketplace Rules. Consequently, the Company has until May
21, 2002 to regain compliance. The Company is currently evaluating all possible
actions.
If the Company is unable to maintain its current listing or move to an
alternative exchange, we will not be able to "Put" any additional shares under
the Private Equity Line. In addition, even if we are able to maintain our
listing and based upon the current stock price, the Company may not be willing
to "Put" any additional shares.
THE EXERCISE OF OPTIONS AND WARRANTS WILL BE DILUTIVE TO OUR EXISTING
STOCKHOLDERS
As of December 31, 2001, we had outstanding warrants and options to
purchase a total of 23,602,370 shares of our Common Stock at prices ranging from
between $0.50 and $31.50 per share, 16,708,369 shares of which are fully vested.
We are also authorized to issue up to an additional 6,103,000 options without
shareholder approval under our existing stock option plans.
THE NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF OUR
SUBORDINATED DEBENTURES COULD NEGATIVELY EFFECT THE MARKET PRICE FOR OUR COMMON
STOCK
We have outstanding subordinated debentures which are convertible into
Common Stock at the holders' option at a conversion price equal to 90% of the
average closing price for the 20 days trading prior to the date of the
conversion notice, but no less than $3.25 per share.
Because the conversion price is not fixed the ultimate number of shares
of Common Stock issueable if the holders elect to convert the $10,000,000
principal amount of the Subordinated Debentures is unknown at this time. Based
upon an average market price of $3.25 per share (which is the minimum conversion
price and above the 20 day trading price), we would be obligated to issue
3,076,923 shares on conversion if all $10 million of the Subordinated Debentures
were converted.
11
WE MAY ISSUE ADDITIONAL SHARES AND DILUTE YOUR OWNERSHIP PERCENTAGE
Some events over which you have no control could result in the
issuance of additional shares of our Common Stock or Preferred Stock, which
would dilute your ownership percentage in the Company. We may issue
additional shares of Common Stock or Preferred Stock:
- to raise additional capital or finance acquisitions;
- upon the exercise or conversion of outstanding options
and warrants;
- upon the sale of shares of Common Stock pursuant to the Private
Equity Line Agreement;
- as interest payments for and/or upon conversion of
certain Subordinated Debentures that have been issued; and/or
- in lieu of cash payment of dividends or for services rendered.
YOUR PERCENTAGE OF OWNERSHIP AND VOTING POWER AND THE PRICE OF OUR COMMON STOCK
MAY DECREASE BECAUSE WE HAVE ISSUED, AND IN THE FUTURE MAY ISSUE, A SUBSTANTIAL
NUMBER OF SHARES OF COMMON STOCK OR SECURITIES CONVERTIBLE INTO OR EXERCISABLE
FOR OUR COMMON STOCK
We have the authority to issue up to 200,000,000 shares of our Common
Stock and 20,000,000 shares of our Preferred Stock without stockholder approval.
We may also issue options and warrants to purchase shares of our Common Stock.
Future issuances could be at values substantially below the price paid for our
Common Stock by current stockholders. We may conduct additional future offerings
of our Common Stock, Preferred Stock, or other securities with rights to convert
the securities into shares of our Common Stock which may result in a decrease in
the value or market price of our Common Stock. Further, the issuance of
Preferred Stock could have the effect of delaying, deferring or preventing a
change of ownership without further vote or action by our stockholders and may
adversely affect the voting and other rights of the holders of Common Stock.
WE ANTICIPATE VOLATILITY IN OUR STOCK PRICE
The market price for securities in our industry historically has been
highly volatile. From January 1, 2000 through March 13, 2002, the price of our
Common Stock has fluctuated between $39.75 and $0.20 per share. The price of our
Common Stock may be subject to fluctuations in response to:
- quarter to quarter variations in operating results;
- vendor additions or cancellations;
- creation or elimination of funding opportunities;
- favorable or unfavorable coverage by securities analysts;
- the availability of products, technology and services; and
- other events or factors, many of which are beyond our control.
These broad market and industry factors may cause the price of our Common
Stock to decline, regardless of our actual operating performance.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K and other materials we have filed or may
file with the Securities and Exchange Commission, as well as information
included in oral statements or other written statements made, or to be made, by
us, contain, or may contain disclosures which are "forward-looking statements".
This Annual Report on Form 10-K contains forward-looking statements. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "could," "may," "will," "believes," "anticipates,"
"plans," "expects," "projects," "estimates," "intends," "continues," "seeks,"
"predicts," "expectations," variations of such words and similar expressions
12
are intended to identify forward-looking statements. These forward-looking
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions ("Future Factors") that are difficult to predict.
As a result, because these statements are based on expectations as to future
performance and events and are not statements of fact, actual events or results
may differ materially from those expressed or forecast in such forward-looking
statements. Factors that might cause the Company's actual results to differ
materially from those indicated by such forward-looking statements include,
without limitation, those discussed in our filings with the Securities and
Exchange Commission, including but not limited to our most recent proxy
statement and "Risk Factors" in our most recent Form S-3, as well as Future
Factors that may have the effect of reducing our available operating income and
cash balances.
Future Factors include risks associated with the uncertainty of future
financial results; government approval processes; changes in the regulation of
the healthcare and technology industries at either the federal or state levels;
changes in reimbursement for services by government or private payors;
competitive pressures in the healthcare and technology industries and the
Company's response thereto; delays or inefficiencies in the introduction,
acceptance or effectiveness of new products; the impact of competitive products
or pricing; the Company's relationships with customers and partners; cash
expenditures related to possible future acquisitions and expansions; on-going
capital expenditures; the Company's ability to obtain capital on favorable terms
and conditions; increasing prices of products and services; U.S. and non-U.S.
competitors, including new entrants; rapid technological developments and
changes and the Company's ability to continue to introduce competitive new
products and services on a timely, cost-effective basis; the mix of products and
services; the availability of manufacturing capacity, components and materials;
the ability to recruit and retain talent; the achievement of lower costs and
expenses; credit concerns in the emerging service provider market; customer
demand for the Company's products and services; U.S. and non-U.S. government and
public policy changes that may affect the level of new investments and purchases
made by customers; changes in U.S. and non-U.S. governmental regulations;
protection and validity of patent and other intellectual property rights;
reliance on large customers and significant suppliers; the ability to supply
customer financing; technological implementation; and cost/financial risks in
the use of large, multiyear contracts; the Company's credit ratings; the outcome
of pending and future litigation; continued availability of financing, financial
instruments and financial resources in the amounts, at the times and on the
terms required to support the Company's future business; general industry and
market conditions and growth rates; and general U.S. and non-U.S. economic
conditions, including interest rate and currency exchange rate fluctuations.
You are cautioned not to unduly rely on such forward-looking statements
when evaluating the information presented herein. These statements should be
considered only after carefully reading this entire Form 10-K and the documents
incorporated herein by reference.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") costs are expensed as incurred. Through
December 31, 2001, the Company's continuing R&D groups of related projects (the
"Projects") focused on developing the family of Electronic HouseCall -Registered
Trademark- products and services. Specifically during 2001, the Company expanded
the number of EHC Units (as previously discussed) that operate using a
POTS-based environment or through the use of broadband communication environment
capabilities. The Company manages its spending on the entire product line as a
single project and captures neither costs incurred to date nor estimated
completion costs by individual EHC Unit or specific software functionality.
Due to the uncertainties associated with the ultimate design
specifications that will be required in order for the medical community to
accept and efficiently utilize our products and services, Company management is
unable to estimate the completion cost for the Projects.
Current Projects primarily involve the development of a group of related
hardware and software projects that are intended to result in new additions to
the Electronic HouseCall -Registered Trademark- family of products. This
includes more compact and portable tele-health monitoring Units and enhanced
software to allow these Units to seamlessly integrate with the existing
CyberCare System product and services portfolio. These projects are also
intended to result in the design of the final working models. These projects are
grouped into one overall project since each of the new product and service
offerings
13
must integrate with the entire EHC family of products and services to ensure
integrated, cost effective health care monitoring.
During 2001, 2000 and 1999, the Company incurred R&D expenses of
approximately $13,128,000, $9,312,000 and $349,000, respectively. During 2000,
the Company hired 33 full-time employees and consultants engaged in R&D
activities and also engaged several outside contractors and a major software
company to accelerate software development initiatives. In addition to salaries,
employee benefits and contractor fees, research, development and engineering
expenses also include leased building costs, utilities, supplies and R&D
equipment costs.
Most of the Company's products and services are developed internally.
Internal development allows the Company to maintain close technical control over
products and services in terms of design specifications and modifications based
on customer needs, and allows the Company to create a family of products that
provides natural migration paths for customers as their business needs change.
The tele-health industry is characterized by extremely rapid changes in
technology, which require continuous expenditure on product research and
development to create new, more mobile and flexible products and services. The
Company believes that the timely, cost-effective development of new products and
services is essential to maintain its competitive position in the marketplace.
SALES AND MARKETING
We market each of our services through various methods, including cross
marketing, customer and physician referrals, reputation in the community, and
third parties.
TECHNOLOGY SEGMENT
Using our direct sales force, we intend to market our EHC-TM- system in
various ways to payors and providers, including, but not limited to, state
Medicaid agencies, Veterans Administration, indigent care organizations, the
military, major self-insured employers, insurance organizations, and major
managed care organizations. We also will form joint ventures and strategic
alliances with companies that have market capabilities with potential customers
and geographic markets identified, domestically and worldwide.
PHYSICAL THERAPY AND REHABILITATION SERVICES SEGMENT
We rely upon community reputation, customer referral, and medical
resource referrals and payor sources. We identify market areas to expand in and
open new clinics based on our experience and market demographics.
PHARMACY SERVICES SEGMENT
We have targeted our marketing efforts to accelerate sales by expanding
existing customer relationships and targeting certain assisted-living facilities
("ALFs"). As the population ages and expands and many of these older individuals
relocate to areas we serve, the market for pharmaceuticals to ALFs increases.
Currently, we have concentrated on ALFs located in central and west Florida and
on developing our customer base through direct mail marketing.
EMPLOYEES
As of March 31, 2002, we employed approximately 269 persons, of which
approximately 216 are full-time. Our ability to provide our services is
dependent upon our ability to recruit, hire and retain qualified technical and
management personnel. To date, we have been able to recruit and retain
sufficient qualified personnel. None of our employees are represented by a labor
union. We have not experienced any work stoppages and consider our relations
with our employees to be good.
14
COMPETITION
TECHNOLOGY SEGMENT
Our tele-health solutions business is part of a relatively new and
evolving industry. Competition comes from companies in the tele-health and
recorded monitoring business and from other industries. The healthcare industry
in general and the market for medical ancillary services is highly competitive.
We compete with ancillary services companies that are larger in size and have
access to considerably greater financial resources than we do. Competition in
the tele-health technology business is in the early stages. We believe that we
compete by providing better technology and tele-health solutions and more
personalized care to the patients and customers we serve.
Tele-health solutions are continually evolving in response to the health
care industry's needs and desires, and as new applications for technology are
proven. The availability of connectivity options is also broadening as many
applications can now be supported by plain old telephones to broadband.
Much of the current innovation in tele-health technology consists of
incremental improvements in existing technologies with lighter products, smaller
components, and connectivity options. However, innovations in medical technology
require contributions from many fields of science thus lending itself to a
complex, resource intensive process (labor, time, knowledge and money). Many of
our competitors have not been able to withstand this resource intensive process.
Those that have remained have been able to do so because of significant
financial resources.
Much of the current competition in our targeted markets is focused on a
single product or solution rather than offering choices based on the needs and
resources readily available to the provider, organization and population they
serve. There are few players with national and international name recognition in
this marketplace, such as Panasonic and Phillips/Agilent, of these, price and
market focus shift have been barriers in their gaining any substantial market
share. While there are a number of small, privately held companies in the
market, only a few (HomeMed and American Telecare) have managed to obtain any
significant share of the market.
We have positioned ourself to meet a wide variety of needs for varying
health care delivery systems, including interactive video applications using
POTS or broadband that operates on a secure network or point to point, capturing
and forwarding physiological vital signs (heart rate, blood pressure, weight)
with a small non-obtrusive device that automatically transmits the data to the
CyberCare network. Web-based access to patient data is also offered which
affords providers access to critical clinical data anywhere they can log onto
the Internet. The flexibility of choice in integrated and component-based
devices, married with connectivity and software options offered by us, paves the
way for cost-effective scalable solutions to meet both organizations and
communities' needs today and in the future.
PHYSICAL THERAPY AND REHABILITATION SERVICES SEGMENT
In the physical therapy and rehabilitation industry there are thousands
of treatment centers, organizations, clinics and facilities many of which are
larger in size than we are and which have access to considerably greater
financial resources than we do.
PHARMACY SERVICES SEGMENT
Our pharmacy business competes directly with many companies for the sale
and delivery of prescription drugs to individuals living in ALFs. There are
numerous competitors larger than us that have access to considerably greater
financial resources. We rely on reputation and service to market our services.
GOVERNMENT REGULATION
The Health Insurance Portability and Accountability Act of 1996
("HIPAA"), among other things, mandates administrative simplification of
electronic data interchanges of health information, including standardizing
transactions, establishing uniform health care provider, payer and employer
identifiers and seeking protections for confidentiality and
15
security of patient data. Final regulations governing healthcare transaction
security were published in the August 17, 2000 FEDERAL REGISTER, and will
become effective for most entities in or after October 2002. Final
regulations governing privacy and confidentiality of individually
identifiable health information were published in the December 20, 2000
FEDERAL REGISTER, and will become effective for most entities in or after
February 2003. Many of the provisions of HIPAA do not directly apply to our
technology business since it is not included in the types of entities to
which HIPAA applies. However, because we may be considered a business
associate of a covered entity, and because the implementation of our EHC-TM-
system for our customers necessitates that we have interaction with patient
users of the system, we will nonetheless have to comply with certain aspects
of the HIPAA regulations in order to assure compliance by our customers.
HIPAA also applies to our physical therapy and rehabilitation service
segment, as well as our pharmacy segment. We are proceeding to assess where
our current systems diverge from HIPAA's privacy and security requirements
and to implement protocols and procedures that will bring such systems and
areas into compliance before the deadlines identified in the final
regulations. We are unable at this time to assess the cost of implementation
of the administrative simplification requirements of HIPAA that are
applicable to our business.
TECHNOLOGY SEGMENT
Our Electronic HouseCall-Registered Trademark- products are also subject
to regulation by the FDA in the United States and by comparable bodies in other
countries. Necessary FDA clearance has been received for all current models of
the EHC and for peripheral devices. Filings will be made in other countries as
needed.
As a governmental contractor, the Company is required to be in compliance
with various government regulations such as procurement, labor and employment
laws and regulations. To our knowledge, and other than what we have described
herein and other than occupational health and safety laws and labor laws which
are generally applicable to most companies, our products are not subject to
governmental regulation by any federal, state or local agencies that would
affect the manufacture, sale or use of our products. We cannot, of course,
predict what sort of regulations of this type may be imposed in the future, but
we do not anticipate any unusual difficulties in complying with governmental
regulations which may be adopted in the future.
In the event that we are found to be out of compliance with these
regulations, we could be delayed from obtaining a contract or disbarred or
disqualified from becoming a government contractor. Further, there could be
certain fines or penalties associated with noncompliance with these or other
regulations. Any of these events will have adverse financial consequences.
PHYSICIAL THERAPY AND REHABILITATION SERVICES SEGMENT
Our physical therapy and rehabilitation business is subject to extensive
federal and state regulations related to fee limitations, quality control
requirements and accounting and cost tracking requirements. These operations are
subject to periodic review and inspection of facilities, patient records and
billing policies which, if the applicable regulatory agency finds deficiencies,
may result in reduction or stoppage of reimbursements and/or fines and
penalties. Additionally, these operations are subject to severe restrictions
relative to referrals from and compensation to physicians as provided by the
Federal "Stark" Laws and Florida Self-Referral Laws, as well as state and
federal "anti-kickback" laws and regulations. Violations of any of these rules
can result in penalties and fines and in some cases criminal sanctions.
PHARMACY SERVICES SEGMENT
Our pharmacy business is also subject to extensive federal and state
regulations, many of which are specific to pharmacies and the sale of
over-the-counter drugs. Regulations in this area often require subjective
interpretation, and we cannot be certain that our attempts to comply with these
regulations will be deemed sufficient by the appropriate regulatory agencies.
Violations of any of these regulations could result in various civil and
criminal penalties, including suspension or revocation of our licenses or
registrations, seizure of our inventory, or monetary fines, which could
adversely affect our operations. As we expand our product and service offerings,
more of our products and services will likely be subject to regulation by
federal and/or state authorities, which regulates drug advertising, promotion
and dispensing. Complying with governmental regulations is time consuming,
burdensome and expensive, and could delay our introduction of new products and
services.
16
ITEM 2. DESCRIPTION OF PROPERTY
We believe our various facilities are adequate to meet our current
business needs, and that our properties are adequately covered by insurance.
In December 2000, the Company relocated its corporate office and
consolidated certain subsidiaries' locations to a facility in Boynton Beach,
Florida. The Company leases approximately 30,000 square feet at an average
monthly net rental of $31,459 over the term of the lease. The lease expires in
April 2006. In December 2001, the Company subleased approximately 9,100 square
feet through April 2006. The monthly payment for the first two years of the
sublease is $11,416 per month with increases for the last two years.
Our Technology segment leased approximately 9,700 square feet of office
space in Roswell, Georgia. The lease was for five years and the monthly rental
was approximately $10,400. In February 2001, CyberCare moved to a new facility
located in Norcross, Georgia leasing approximately 12,500 square feet at an
average monthly net rental of $13,428 with annual increases. The lease expires
in January 2006. The lease on the Roswell, Georgia space has been assumed by a
third party.
Our physical therapy and rehabilitation services segment leases
approximately 49,000 square feet of space for its 44 rehabilitation centers
located throughout Florida for a total monthly rental of approximately $100,000.
The leases expire periodically through November 2006.
Our pharmacy services segment leases 14,600 square feet of office and
warehouse space in Lakeland, Florida. The lease term is for five years with an
option to renew for an additional five years and monthly net rental cost for
such space is approximately $5,250. The lease expires in July 2004.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in litigation with various parties regarding
matters of dispute that have arisen in the normal course of business, the
outcome of which the Company cannot predict at this time. In these cases where a
material amount is in dispute and in which either insurance is not available or
where an insurer asserts a defense, the Company believes it has the benefit of
insurance coverage, although there is no assurance that with respect to any
particular dispute for which insurance coverage may be applicable the insurer
will not assert that a defense or exemption to coverage applies or that the
amount of coverage will be sufficient. In those cases where a material amount is
in dispute and in which either insurance is not available or where an insurer
asserts a defense or exemption to coverage, the Company cannot presently
estimate the liability, or predict the impact, if any, that any such litigation
may have on the Company's liquidity or financial condition. The Company
anticipates that there will not be a material impact on its financial condition
or results of operations from the outcomes of these legal actions, except as
discussed in the following paragraphs.
The Company has previously disclosed the 14 purported class action
lawsuits that were filed against CyberCare and certain of its executive officers
alleging violations of federal securities laws. These lawsuits were consolidated
into a single class action lawsuit by the United States District Court for the
Southern District of Florida on November 4, 2000. The Consolidated Amended
Complaint ("Complaint") principally alleges that the Company and certain of its
officers and directors made misrepresentations or omissions regarding the
development and future sales forecasts of its Electronic HouseCall-Registered
Trademark- system products and revenues of its pharmacy division. The Complaint
seeks unspecified damages and costs. The Company's motion to dismiss was denied
on August 20, 2001. Mediation has been ordered by the court. The Company and its
management believe the Complaint lacks merit and they intend to vigorously
defend against the Complaint. The Company also believes that any liability will
be covered under an insurance policy. The insurer has asserted that an exclusion
from coverage applied, which the Company strongly disputes. The Company and the
insurer are currently involved in discussions to resolve the insurance coverage
issue, but the Company cannot predict the
17
outcome of those discussions. The Company and its management cannot predict the
outcome of this litigation or the impact that the Complaint, or any other suits,
claims, or investigations relating to the same subject matter, may have on the
Company's liquidity or financial condition. In light of the foregoing, the
Company's liability, if any, in relation to such possible claims cannot be
estimated at this time.
Our Physical Therapy and Rehabilitation subsidiary ("PT&R") received a
letter from the Center for Medicare and Medicaid Services ("CMS") and its
intermediary in April 2001 notifying it of the suspension of Medicare payments.
CMS alleged that certain patient complaints, which constituted less than 1% of
PT&R's Medicare patients, and other alleged regulatory non-compliance, justified
the payment suspension. During the suspension, the Medicare program continued to
process PT&R's claims, but held payment in escrow. In August 2001, the
suspension was lifted and payment for processed claims was released although
approximately $1,114,548 remains held in escrow, pending further review. The
Company has learned that CMS has completed its review and a formal determination
is expected shortly, which is anticipated to include a release of the escrowed
amount as offset by an amount for denied claims. The denied claims may be
appealed through the CMS administrative appeal process. As of December 31,
2001, the Company has recorded an allowance for uncollectibles in the amount
of $500,000 against the balance being held.
A complaint was filed against us on August 13, 2001, alleging that the
Company breached certain obligations in connection with the removal of a
registrictive legend from stock issued to the plaintiff. Mediation was held
in March 2002, which resulted in settlement of the dispute. The settlement
requires the Company to issue shares of common stock equal in value to
$200,000 to the plaintiff, transfer of the Sleep Disorder Center (previously
owned by the plaintiff) back to the plaintiff, and make a cash payment, which
the Company's insurance carrier has agreed to cover, of $200,000 to the
plaintiff.
A complaint was filed against us by IMRglobal (n/k/a CGI Information
Technology Services) on November 21, 2001 in the 6th Judicial Circuit in and for
Pinellas County, Florida, alleging that the Company breached its obligations to
make payment for software development services. The Company believes the
complaint is without merit and intends to vigorously defend against the suit.
The Company's liability, if any, in relation to this claim cannot be estimated
at this time.
In February 2002, an arbitration panel determined that the Company is
responsible for approximately $1,200,000 in damages and attorneys' fees in
connection with the Company's performance under an option agreement. From
inception the Company believed there was no merit to the claim and damages, if
any, were covered under an insurance policy. The insurer has asserted that an
exclusion from coverage applies, which the Company strongly disputes. The
Company and the insurer are currently involved in dispute resolution proceedings
regarding the coverage denial. As of March 31, 2002, the arbitration award had
not been issued.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, no matter was submitted to a vote of
security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low reported closing bid per
share of our common stock as reported on the Nasdaq National Market for the
years ended December 31, 2001 and 2000 and on the Nasdaq SmallCap Market for the
year ended December 31, 1999.
18
2001 2000 1999
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
First Quarter $ 5.75 $ 2.19 $ 39.75 $ 8.50 $ 1.63 $ 0.63
Second Quarter 3.43 1.00 19.06 3.50 2.25 0.66
Third Quarter 1.87 0.69 9.72 4.25 2.72 0.75
Fourth Quarter 1.63 0.87 6.19 1.50 11.81 1.63
On March 28, 2002, the last bid price of our common stock as reported
on the Nasdaq National Market was $0.25. As of April 9, 2002, there were
approximately 27,382 record owners of our common stock.
It is our present policy not to pay cash dividends and to retain future
earnings to support our growth. Any payment of cash dividends in the future will
be dependent upon the amount of funds legally available therefor, our earnings,
financial condition, capital requirements and other factors that our board of
directors may deem relevant. We do not anticipate paying any cash dividends in
the foreseeable future except for the following:
During 2000, the Board of Directors of the Company approved a dividend to
all shareholders of record on March 31, 2000 of 5% of the consideration received
from the sale of the air ambulance segment (cash and common stock). As of
March 31, 2002, the Company has not paid the dividend.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
When reviewing the selected financial data, you should consider that in
September 1999 we acquired CyberCare Technologies, Inc. in a transaction that
was accounted for under the purchase method of accounting. In addition, on
January 26, 2001, October 31, 2000 and August 31, 1999, we sold our physician
practice, one of our rehabilitation subsidiaries, and our home infusion
subsidiary, respectively. All other subsidiaries not currently owned have been
accounted for as discontinued operations.
The table that follows presents selected financial data from our
consolidated financial statements. The following selected financial data
should be read in conjunction with the Company's consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial
information included elsewhere in this Form 10-K.
19
(In thousands, except share and per share data)
Year ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Net sales $ 18,241 $ 19,320 $ 16,844 $ 6,117 $ 74
------------ ------------ ------------ ------------ ------------
Costs and expenses:
Cost of services 15,777 12,702 7,754 2,428 49
Selling, general and administrative 17,626 16,944 9,413 4,865 1,418
Research and development 13,128 9,312 349 - -
Depreciation and amortization 2,225 1,984 822 348 51
(Gain) Loss on sale of subsidiaries (92) 1,323 (1,256) 264 -
Non-recurring severance and settlement costs 2,897 - - -
------------ ------------ ------------ ------------ ------------
Total costs and expenses 51,561 42,265 17,082 7,905 1,518
------------ ------------ ------------ ------------ ------------
Operating loss (33,320) (22,945) (238) (1,788) (1,444)
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income 1,264 1,859 93 281 183
Interest expense (1,089) (541) (1,283) (1,442) (77)
Amortization of beneficial conversion (546) (657) (8,572) - -
feature and discount
Write-off of investment in securities - (2,425) - - -
------------ ------------ ------------ ------------ ------------
Total other expense, net (371) (1,764) (9,762) (1,161) 106
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (33,691) (24,709) (10,000) (2,949) (1,338)
Discontinued operations:
(Loss) Income from operations of discontinued - (1,627) (118) (3,092) 186
businesses
Estimated loss on disposal of discontinued
businesses (11,225) (2,362) (690) (1,510) -
------------ ------------ ------------ ------------ ------------
Net loss before extraordinary item (44,916) (28,698) (10,808) (7,551) (1,152)
Extraordinary item - gain from retirement of debt - - - 170 -
------------ ------------ ------------ ------------ ------------
Net loss $ (44,916) $ (28,698) $ (10,808) $ (7,381) $ (1,152)
============ ============ ============ ============ ============
Loss per common share - basic and diluted:
Loss from continuing operations $ (0.51) $ (0.40) $ (0.30) $ (0.16) $ (0.24)
Discontinued operations (0.17) (0.07) (0.03) (0.24) 0.03
Extraordinary item - - - 0.01 -
------------ ------------ ------------ ------------ ------------
Net loss $ (0.68) $ (0.47) $ (0.33) $ (0.39) $ (0.21)
============ ============ ============ ============ ============
Weighted average common shares outstanding 65,670,873 61,147,042 32,882,376 18,873,992 5,476,495
============ ============ ============ ============ ============
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities $ 1,066 $ 16,731 $ 11,759 $ 422 $ 862
Total assets 31,229 59,733 55,282 14,484 14,169
Convertible subordinated debentures 8,076 - 15,828 3,492 -
Total stockholders' equity 10,419 49,334 34,796 10,497 11,604
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
CyberCare, Inc. ("CyberCare" or the "Company") is a holding company
which is comprised of a healthcare software technology solutions business; a
physical therapy and rehabilitation business; and a pharmacy business. The
physical therapy and rehabilitation business comprises 42 clinics in the
state of Florida. The pharmacy supports approximately 4,000 patients in about
94 assisted living centers in Florida and is licensed for mail order
distribution across all fifty states. The technology business is intended to
improve the delivery of care through its patented technology and intellectual
property. Our technologies segment offerings include cost effective, patient
centric, network, point to point, mobile and internet based ASP applications
to create an interactive community incorporating all members of the care team
in the healthcare delivery process. Utilizing patented technology for remote
monitoring and real-time interactive communications, applications focus on
the chronically ill, wellness management, physician oversight and wound care.
During early 2001, the Company recognized the lack of availability for
broadband communication and determined there was a need to expand its line of
products to include equipment that would also function in a POTS (plain old
telephone service) environment. In order to accomplish this task, the Company
hired its current President and Chief Executive Officer, Joseph Forte, formerly
of Eastman Kodak Company.
With the leadership of Mr. Forte, the Company allocated significant
capital, as well as personnel and other resources to the development of various
new EHC products that have the capability of using POTS or broadband connections
which better address the needs of the healthcare marketplace. A description of
each product is included in our Business Section.
CyberCare, Inc. reported net losses of $44,916,000, $28,698,000, and
$10,808,000 or ($0.68), ($0.47), and ($0.33) per share for the years ended
December 31, 2001, 2000 and 1999, respectively. A significant portion of the
2001 results of operations includes a loss on the sale of the air ambulance
business (described below) amounting to $11,028,000, and the further
development, implementation and marketing of our EHC family of products which
contributed $28,501,000 to the Company's loss. Included in the $28,501,000
expenditures are research and development expenses amounting to $13,128,000 for
2001 as compared to $9,312,000 and $349,000 for years ended December 31, 2000
and 1999, respectively.
The Company's working capital decreased from $26,954,000 at December
31, 2000 to ($2,156,000) at December 31, 2001. Accordingly, the Company's
available cash has been reduced to an amount that substantially limits its
operations. Although the Company raised $13,700,000 in convertible and demand
notes during 2001 and through March 2002, the Company is continuing to incur
losses and operating cash flow deficiencies, and must obtain substantial
additional capital to sustain its operations. There can be no assurances that
such capital will be available to the Company on acceptable terms, or at all.
In addition, the Company has made significant reductions in personnel and
overhead costs, and may have to make additional reductions in the near term.
The Company's operations are currently being funded by the issuance of
convertible subordinated debentures that are being sold on an as needed basis
to accredited investors. In addition, on April 12, 2002, the Company entered
into an agreement with this investor group for an additional $10,000,000
-$15,000,000 of capital. Funding of this amount is contingent upon the
Company achieving certain financial and operational milestones. There can be
no assurances that the Company will achieve these milestones, or if not
achieved, that the investor group will continue to fund the Company's working
capital and operating cash flow deficiencies.
As a result of the above, the Independent Certified Public
Accountants' Report on the Company's consolidated financial statements
appearing at Item 8 includes an explanatory paragraph indicating that the
Company's recurring losses from operations, operating cash flow deficiencies
and negative working capital raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
The Company currently has three operating segments, the technology
segment, the physical therapy and rehabilitation segment, and the pharmacy
segment. During 2001, 2000 and 1999, the physical therapy and rehabilitation
and pharmacy segments have provided the majority of our revenues.
DISCONTINUED OPERATIONS
Effective March 1, 1999, the Company acquired 100% of the outstanding
common stock of Air Response North, Inc. ("Air Response") in exchange for
3,866,667, shares of common stock valued at $0.75 per share. The $1,015,000
excess of the purchase price over the fair market value of the net assets
acquired was recognized as goodwill.
21
Effective September 2, 2000, the Company entered into an agreement (the
"ARMT Agreement") to sell the subsidiaries (which include Air Response) that
comprise its international air ambulance transport segment ("Air") to a former
board member of the Company and to Air Response Medical Transport Corp. ("ARMT")
for $8,500,000 plus assumption of all debts related to the subsidiaries'
operations. Under the terms of the ARMT Agreement, ARMT paid $2,400,000 in
CyberCare common stock and issued a $6,100,000 short-term note bearing interest
at 10% (the "ARMT Note"), which was collateralized by substantially all of the
Air assets and 345,921 shares of the Company's common stock which was held in
escrow. ARMT also assumed all of Air's debt, which aggregated approximately
$18,400,000 on September 2, 2000, in accordance with the ARMT Agreement. Air
revenues aggregated $15,730,000, $13,780,000 and $21,055,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
The Company expected that the sale of Air to ARMT would have been
completed by September 2001. Due to the inability of ARMT to raise sufficient
capital, ARMT ultimately defaulted on the ARMT Note on October 1, 2001, upon
which the Company gained control of ARMT (and the operating subsidiaries), and
thus regained control of Air. Also, the Company retained all CyberCare common
shares received as consideration in the original transaction. Upon notification
of default and waiver by the former board member of any ownership right in ARMT
and Air, the Board of Directors again approved the disposal of Air and the
Company began actively searching for a new buyer.
Effective September 30, 2001, the Company entered into an agreement to
sell the operating subsidiaries comprising Air to Global Air Response, Inc. an
unrelated party ("GAR"). The transaction was not completed because certain
guarantees made by certain of the operating subsidiaries could not be released
to the satisfaction of GAR. Key management personnel of Air, along with certain
unrelated third parties, expressed an interest in acquiring the business under
the same terms as the GAR transaction. In anticipation of this transaction,
Air's key management team established a corporation ("AIM").
Effective December 3, 2001, the Company entered into a transaction with
AIM (the "AIM Agreement") in which AIM assumed the office/hangar leases on the
physical locations, purchased the existing furniture, fixtures and equipment
(except aircraft) and acquired the corporate telephone numbers, corporate names,
employees and the Federal Aviation Administration ("FAA") 135 Certificate of
Air. The Company retained ownership of the Air aircraft and intends to sell such
aircraft as soon as is practicable. Until the aircraft are sold, the Company
will remain liable for approximately $13,700,000 of long-term debt owed on the
aircraft. Although the Company intends to sell the aircraft, AIM has agreed to
lease certain of the aircrafts for as long as the Company still owns them, up to
a maximum of 30 months, for use in its business. The Company has the right to
sell any of the leased aircraft at any time to a third party upon providing AIM
a thirty day right-of-first-refusal to match the third party offer following the
Company's receipt of the third party offer. If AIM does not exercise its right,
the Company can consummate the sale of the aircraft to that third party, after
which time the Company would have no further obligation under its aircraft
leases.
Under the terms of the AIM Agreement, AIM issued a $5,000,000 promissory
note (the "AIM Note") which bears interest at 6% and is convertible into a 19.9%
dilutable, non-voting interest in AIM. Repayment of the AIM Note, including
interest, is contingent upon AIM obtaining agreed upon levels of net
distributable profits (as defined in the AIM agreement) of the business. Due to
the uncertainty surrounding collection of such payments, the Company has fully
reserved the AIM Note and included the amount in the calculation of the
"Estimated loss on disposal of discontinued businesses" in the accompanying
consolidated statement of operations for the year ended December 31, 2001. Also,
included in the 2001 "Estimated loss on disposal of discontinued businesses" is
a write-off of all amounts owed under the defaulted ARMT Agreement discussed
above.
However, for financial accounting purposes, a sale will not be
recognized until the Company sells all of its aircraft and is removed from
the related debt guarantees. Accordingly, until such event occurs, the
operations of the air ambulance segment will be accounted for as discontinued
operations. At December 31, 2001, the Company had a $1,000,000 accrual for the
estimated future operating losses of Air, which is also included in the 2001
"Estimated loss on disposal of discontinued businesses."
The Company is currently obligated under certain leases regarding the
operation of its mobile cardiac catherization labs ("Labs"). The Labs were
discontinued in 1999 at which time the Company estimated and recorded a
22
cost to dispose of the Labs. The Company is still attempting to either sell the
Labs or otherwise transfer the related lease obligations. These obligations will
be satisfied no later than February 2003. In 2001, the Company revised its
estimate to dispose of the Labs and recorded an additional $197,000 of expense
related to this disposal which is included as part of the "estimated loss on
disposal of discontinued businesses."
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto contained elsewhere in this
report.
The following table presents the revenue for each segment and its related
cost of services for the periods indicated:
2001 2000 1999
---- COSTS OF ----- COSTS OF ---- COSTS OF
REVENUE SERVICES REVENUE SERVICES REVENUE SERVICES
------- -------- ------- -------- ------- --------
Technology $ 1,561,000 $ 4,163,000 $ 988,000 $ 1,330,000 $ 1,558,000 $ 109,000
Physical Therapy and
Rehabilitation Services 10,437,000 6,361,000 11,984,000 6,340,000 9,377,000 4,571,000
Pharmacy Services 6,243,000 5,253,000 6,348,000 5,032,000 4,709,000 3,074,000
Other and Corporate - - - - 1,200,000 -
----------- ----------- ----------- ----------- ----------- -----------
Total $18,241,000 $15,777,000 $19,320,000 $12,702,000 $16,844,000 $ 7,754,000
=========== =========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000
REVENUE
Total revenues for 2001 decreased by approximately 5.6% when compared
to 2000. The total revenue decrease was a result of a decrease in the
physical therapy and rehabilitation services segment of approximately
$1,547,000, compared to 2000 offset by an increase in the technology segment
of approximately $573,000 or 58% and a decrease in the pharmacy services
segment of approximately $105,000, or 1.7%, as compared to 2000.
The decrease from 2000 to 2001 in the physical therapy and rehabilitation
services segment was a result of the sale of one of the segment's subsidiaries
in October 2000 which generated revenue of approximately $3,262,000 during 2000.
This decrease was offset by an increase in revenue generated in the approximate
amount of $1,715,000 due to an increase in the number of locations serviced and
per location revenue during 2001 compared to 2000.
Our technology revenue increased approximately $302,000 as a result of an
increase in the number of EHC Units deployed in 2001 as compared to 2000, and
our sleep disorder center revenue increased by approximately $271,000 as a
result of an increase in the number of patients served.
The decrease in revenue from our pharmacy services segment resulted from
the elimination of unprofitable customers during 2001.
COST OF SERVICES
Excluding the effects of two former subsidiaries which were sold in
October 2000 and January 2001, the increase in costs of services relating to the
physical therapy and rehabilitation services segment is consistent with the
corresponding increase in revenue for such segment, because of the increased
number of operating locations, revenue for this segment increased as well as the
direct operation costs such as salaries, rent and supplies.
23
The costs of services relating to the pharmacy segment increased in spite
of a decrease in revenue due to higher costs for prescription drugs and an
increase in the cost of deliveries during 2001 over 2000.
The cost of services for the technology segment for 2001 increased by
approximately 213% when compared to 2000. The total cost of revenue
increased in relationship to the revenue generated was a result of the
additional costs incurred during 2001 for the development of the CyberCare
System and the EHC-TM- Units which included the hiring of additional
personnel, the leasing of a new facility, and other costs directly related to
the CyberCare System.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for 2001 increased by
approximately $682,000, or 4.0% compared with 2000. The increase was due to an
increase in facility and personnel costs. We expect selling, general and
administrative expenses to decrease in 2002, as we have restructured our
staffing requirements and reduced overall expenditures.
RESEARCH AND DEVELOPMENT
Research and development expenses increased in 2001 by approximately
$3,816,000 or 41% when compared to 2000. The increase was primarily due to an
increase in staffing levels in our technology segment. We have dedicated
their resources primarily on the new products developed in 2001 and upgrades
to existing technology.
During 2002, the Company expects to spend approximately $3,700,000 on
research and development.
GAIN (LOSS) ON SALE OF SUBSIDIARIES
In January 2001, the Company recorded a gain on the sale of its physician
practice in the amount of $92,000.
In October 2000, the Company recorded a loss on the sale of one of its
rehabilitation subsidiaries in the amount of $1,323,000.
NON-RECURRING SEVERANCE AND SETTLEMENT COSTS
During 2001, the Company incurred certain non-recurring severance and
settlement costs relating to the settlement of certain litigation, amounting
to approximately $1,158,000; severance payments to former executives
amounting to approximately $780,000, a charge in the amount of $709,000 for
the fair market value of options held by one of our former executives, due to
the forgiveness of interest owed on a stock subscription receivable, and a
$250,000 cash payment expensed upon termination of a contract.
OTHER INCOME (EXPENSE)
During 2001, interest income decreased to $1,264,000 compared with
$1,859,000 in 2000, primarily as a result of the decrease in available funds to
invest.
During 2001, interest expense increased from $541,000 to $1,089,000 in
2001 as a result of the issuance of the convertible subordinated debentures in
May 2001.
During 2001, amortization of beneficial conversion feature and discount
decreased from $657,000 to $546,000 as a result of conversion of all previous
outstanding debentures in early 2000 and was offset by the issuance of
convertible subordinated debentures in May 2001.
24
DISCONTINUED OPERATIONS
Losses related to discontinued operations increased by approximately
$7,236,000 due to write-off of the remaining assets of the air ambulance
subsidiaries including the $5 million note receivable due from the purchasers.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999
REVENUE
Total revenues for 2000 increased by approximately 14.7% when compared to
1999. The total revenue increase was a result of an increase in the revenue
generated in the pharmacy and physical therapy and rehabilitation services
segments.
The physical therapy and rehabilitation services segment increased
revenue in the amount of approximately $2,607,000 compared to 1999. This
increase was due primarily to internal growth during 2000 and revenue generated
from the Carolina Rehab acquisition, which was subsequently sold.
The pharmacy segment increased revenue in the amount of approximately
$1,639,000 compared to 1999. This increase was due primarily to increases in the
number of ALFs being serviced and the number of prescriptions being filled.
The technology segment had an overall decrease in revenue in 2000 over
1999 due to a reduction of revenue from the Company's Sleep Disorder Center
of approximately $881,000, but was offset by an increase in sales of our EHC
Units of approximately $311,000.
COST OF SERVICES
Total costs of services in 2000 increased 63.8% to $12,702,000
compared with $7,754,000 in 1999. The increase in costs in relationship to
the revenue generated by the technology segment was for the development of
the CyberCare System and the EHC-TM- Units which included the hiring of
additional personnel, the leasing of a new facility and other costs directly
related to the CyberCare System.
The increase in the costs relating to the physical therapy and
rehabilitation segment is consistent with the increase in revenue for such
segment. Because of the increased number of operating locations, revenue for
this segment increased as well as the direct operating costs such as
salaries, rent, and supplies.
The increase in the costs relating to the pharmacy segment is consistent
with the increase in revenue for such segment. The Company generated an increase
in sales by either contracting with new facilities or by patients having more
prescriptions filled, which required a direct increase in drug purchases and
additional personnel were employed to service these new facilities and fill such
prescriptions
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative expenses increased $7,531,000 or
80%, to $16,944,000 in 2000 compared with $9,413,000 in 1999. The increase was
attributable to the increase in tele-health solutions sales and marketing staff,
their travel and related marketing costs (increase of approximately $953,000);
approximately $350,000 to set-up the Company's Asian tele-health operations;
expansion of the finance and legal departments and associated legal and other
professional fees, including additional costs resulting from the move to the
Nasdaq National Market, and an increase in premiums relating to new and existing
insurance coverages (increase of approximately $2,570,000); and increased
provision for doubtful accounts receivable of approximately $2,719,000.
25
RESEARCH AND DEVELOPMENT
Research and development ("R&D") costs are expensed as incurred. Through
December 31, 2000, the Company's continuing R&D groups of related projects (the
"Projects") focused on developing the family of Electronic HouseCall -Registered
Trademark- (EHC-TM-) products and services. Specifically, during 2000, the EHC
400 broadband patient Unit, EHC 600 broadband caregiver Unit and certain
peripherals, including a thermometer, blood pressure cuff, pulse oximeter,
glucometer and electronic stethoscope were developed and received FDA marketing
clearance. In addition, the EHC 100 Unit and EHC 300 Unit were in the process of
being developed. Also, the Care Management Software (acquired via the Help
Innovations acquisition in November 1999) was continuing to be migrated to the
Company's Electronic HouseCall -Registered Trademark- software application
platform to allow nurse scheduling and prescription tracking to occur from the
same database platform. The Company manages its spending on the entire product
line as a single project and captures neither costs incurred to-date nor
estimated completion costs by individual EHC Unit or specific software
functionality.
Beginning in December 2000, EHC 400 and EHC 600 Units were delivered
under pilot programs to begin testing cost savings, improved quality of care and
customer informational needs (e.g. broadband versus standard phone line
connectivity, video-conferencing, nurse scheduling and prescription tracking).
During 2000 and 1999, the Company incurred R&D expenses of approximately
$9,312,000 and $349,000, respectively. During 2000, the Company hired 33
full-time employees and consultants engaged in R&D activities and also engaged
several outside contractors and a major software company to accelerate software
development initiatives (total expenses resulting from the outsourced software
company activities aggregated approximately $1,146,000 in 2000). In addition to
salaries, employee benefits and contractor fees, research, development and
engineering expenses also include leased building costs, utilities, supplies and
R&D equipment costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense for 2000 increased to $1,984,000
compared to $822,000 in 1999. The increase was primarily due to a full year of
amortization on the licenses relating to the acquisition of Cybercare.
LOSS (GAIN) ON SALE OF SUBSIDIARIES
During 2000, the Company recorded a loss on the sale of Carolina Rehab,
Inc. in the amount of $1,323,000.
During 1999, the Company recorded a gain on the sale of Valley Pain
Centers, Inc. in the amount of $1,256,000.
OTHER INCOME (EXPENSE)
During 2000, interest income increased to $1,859,000 compared with
$93,000 in 1999 primarily as a result of the interest earned from the
$27,500,000 proceeds of the private placement financings that took place in 1999
and 2000.
During 2000, interest expense decreased from $1,283,000 to $541,000 in
2000 as a result of conversion of all outstanding subordinated debentures in
early 2000.
During 2000, amortization of beneficial conversion feature and discount
decreased from $8,572,000 to $657,000 as a result of conversion of all
outstanding subordinated debentures in early 2000.
During 2000, the Company wrote off its investment in Westmark Holdings,
Inc., which resulted in a loss of $2,425,000.
DISCONTINUED OPERATIONS
Discontinued operations consist of the loss from discontinued operations
generated by the air ambulance segment and an estimated loss on disposal of the
mobile cath labs. Loss from discontinued operations for 2000 increased to
$1,627,000 compared to $118,000 in 1999. The increase is due to losses in the
air ambulance segment and mobile
26
cath labs. Estimated loss on disposal for 2000 increased to $2,362,000 compared
to $690,000 in 1999. The increase is due to a change in estimate regarding the
disposition of the mobile cath labs and costs relating to the disposal of the
air ambulance division.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its growth from the sale of equity
securities and convertible debentures. In 2001, 2000 and 1999, the Company
raised, net of expenses, approximately $11,510,000, $37,254,000 and
$20,814,000, respectively, through private debt and equity offerings, which
we are using for research and development, marketing and working capital
purposes. CyberCare Inc.'s working capital requirements will continue to be
significant during 2002. We had a working capital deficit of approximately
$2,156,000 as of December 31, 2001.
The Company has expended significant amounts to develop its technology
segment, including increasing its research and development and administrative
costs. Although the Company has recently taken steps to significantly reduce
operating costs, if revenues from our technology segment do not increase
substantially in the near term, the Company's losses will continue and its
available capital will diminish further. The Company's negative cash flow is
currently being funded through periodic sales of convertible subordinated
debentures to an investor group. In addition, on April 12, 2002, the Company
entered into an agreement with this investor group for an additional
$10,000,000 - $15,000,000 of capital. Funding of this amount is contingent
upon the Company achieving certain financial and operational milestones.
There can be no assurances that the Company will achieve these milestones or,
if not achieved, that the accredited investors will continue to fund the
Company's working capital and operating cash flow deficiencies.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations, to obtain
additional financing, and ultimately, to attain successful operations. The
Company is in the process of seeking funding in addition to the amounts
discussed above and evaluating further cost reductions that will enable it to
meet its funding and related commitments. There can be no assurances that
such efforts will be successful or will be sufficient to meet the Company's
working capital requirements through December 31, 2002.
As a result of the above, the Independent Certified Public
Accountants' Report on the Company's consolidated financial statements
appearing at Item 8 includes an explanatory paragraph indicating that the
Company's recurring losses from operations, operating cash flow deficiencies
and negative working capital raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Our future capital requirements will depend on numerous factors,
including the rate of acceptance of our EHC Units in the market evidenced by
increasing revenues, our ability to manufacture increasing quantities of
products and achieve commercially acceptable gross profits, our ability to
control expenses while developing our products and the nature, timing and
success of our other products under development. We have committed substantial
capital resources to the development of the EHC family of products. During 2001
and 2000 we have spent approximately $13,128,000 and $9,312,000 for research and
development which includes the leasing of a state of the art facility in
Norcross, Georgia for the further development of the EHC family of products and
the expansion of the corporate facility located in Boynton Beach, Florida to
contain a call center and technology center. The associated working capital
requirements for ongoing manufacture and deployment of the EHC, is expected to
be substantial. The timing and amount of working capital requirements cannot be
accurately predicted. In the course of our development, we have substantial
operating losses and expect such losses to continue through 2002.
The Company believes that it will attain the milestones required under
the agreement with the accredited investors as discussed above, and also
believes that it currently has funds to support its current liquidity needs
through December 31, 2002 by utilizing issuance of convertible subordinated
debentures, private equity line, cash flow from its rehabilitation and
pharmacy subsidiaries and currently available cash. The Company's overall
current monthly operating expenses exceed its cash revenues by approximately
$1,250,000. For the short term, the Company will require additional funding
to support its operations, which are anticipated to be raised from the
issuance of convertible subordinated debentures, the sale of additional
common stock, repayment of funds advanced to employees and others, and the
possible sale of the Company's subsidiaries except for the technology
business. The Company is in the process of reducing its monthly negative cash
flow by reducing overall operating costs, reducing capital expenditures,
reducing research and development costs and utilizing current inventory to
support increasing sales in the technology segment.
In January 2002, the Company received $900,000 (less fees of $100,000)
for working capital purposes and signed a $1,000,000 60-day promissory note
dated as of January 22, 2002 with Dynamic Holdings Corporation (the "Note").
The Note was due on March 20, 2002 and interest is due on the unpaid
principal balance at the rate of 8% per annum. If any payment of principal or
interest remains unpaid after the due date, the entire principal sum and
accrued interest thereon shall forthwith become immediately due and payable
at the option of Dynamic Holdings or its designees and, without further
notice, the Company expressly waives notice of such default. The Note is
currently in default, and bears interest at 18% per annum. The Note is
secured by the outstanding balance of that certain $3,225,000 promissory note
dated October 31, 2000, given by Outreach Programs, Inc. to the Company in
exchange for the sale of 100% of the stock in Carolina Rehab, Inc.
In February 2002, the Company received $228,000 (less fees of $2,000)
for working capital purposes and signed a $230,000 10-day promissory note
dated February 25, 2002 with Dynamic Holdings Corporation. The note was due
on March 7, 2002 and interest is due on the unpaid principal balance at the
rate of 8% per annum. If any payment of principal or interest remains unpaid
after the due date, the entire principal sum and accrued interest thereon
shall forthwith become immediately due and payable at the option of Dynamic
Holdings or its designees and, without further notice, the Company expressly
waives notice of such default. The Note is currently in default and bears
interest at 18% per annum. The Note is secured by the outstanding balance of
that certain $3,225,000 promissory note dated October 31, 2000, given by
Outreach Programs, Inc. to the Company in exchange for the sale of 100% of
the stock in Carolina Rehab, Inc.
27
In March 2002, the Company entered into a term sheet with an accredited
investor (the "Lender") whereby the Company may borrow up to $5,000,000 in
exchange for senior convertible promissory note(s) (the "Convertible Note"). The
Convertible Note has a 12-month term and requires interest at 10% per annum,
increasing to 15% retroactively upon default. At the election of the Lender,
both principal and interest are convertible into the Company's common stock at
85% of the closing bid price on the day prior to conversion, but in no event
less than $0.30 per share or more than $1.25 per share. In addition, the Company
issued warrants to purchase 250,000 shares of common stock at $0.75 per share,
exercisable within 24 months for each $2,500,000 funded by the Lender. In
addition, the Company is liable for a commission (payable in cash and warrants)
and the Lender's legal fees in connection with review of the transactional
documents and closing of the transaction. All of the underlying shares, whether
through conversion of the Convertible Note or exercise of the warrants, have
registration rights. As of March 28, 2002, the Company has received $1,500,000
of the committed fundings.
In January 2002, the Company issued an 8% debenture in the amount of
$172,200, which matures on April 23, 2002. The debenture is collateralized by a
pledge of 400,000 of the Company's common shares owned by a former officer and
director.
The cash flow of the rehabilitation subsidiary, as well as the pharmacy
subsidiary are subject to the reimbursement for services rendered from the
government, private insurance companies, and directly from patients. If the
government or private insurance carriers reduce or delay the payments, this may
have a negative effect on our liquidity.
The Nasdaq Stock Market, Inc. ("Nasdaq") has notified the Company that on
February 20, 2002, the price of the Company's common stock had closed for the
previous 30 consecutive trading days below the minimum $1.00 per share
requirement under its Marketplace Rules. Consequently, the Company has at least
until May 21, 2002 to regain compliance or appeal any delisting determination
made by Nasdaq's listing qualifications panel. The Company may also apply for a
transfer of its common stock listing to the Nasdaq SmallCap Market, which has an
extended grace period in which to satisfy the listing requirements for the
Company's securities. If the Company submits a transfer application and pays the
applicable SmallCap Market listing fees by May 21, 2002, initiation of the
delisting proceedings will be stayed pending Nasdaq's review of the application.
If the application is approved, the Company will have until August 19, 2002 to
regain compliance under the Nasdaq Marketplace Rules. An additional 180-day
grace period may be applicable; provided that the Company meets the initial
listing criteria for the SmallCap Market under the Marketplace Rules. The
Company may be eligible to transfer back to the Nasdaq National Market if by
February 17, 2003 it regains compliance in accordance with the Nasdaq
Marketplace Rules. At this time, the Company believes that it qualifies for
initial listing for the SmallCap Market.
Pursuant to the terms of a private equity line agreement, we may issue up
to $30,000,000 of shares of our Common Stock to Strategic Investment Management,
S.A. at a price equal to approximately 85% of the market price of the Common
Stock. By raising additional funds and issuing additional common shares under
the private equity line, our stockholders may experience dilution and various
investors engaging in short selling activities might also affect the market
price of our common shares. As a result of a decrease in our common stock price,
we could face de-listing, a damaged capital structure and a reduction in the
availability of additional financing.
The Company has the ability to draw down funds from the private equity
line subject to the terms and conditions of the private equity line agreement.
The amount that the Company will be able to draw down is dependent on the
Company's stock price and volume. If the stock price decreases, this will
require the Company to issue more shares (and vice versa) and if the trading
volume decreases, then the amount of shares to be put will be minimized, thus
limiting the amount of funding (and vice versa).
If proceeds from the private equity line and from borrowings under the
convertible notes discussed above, are not sufficient to fund our operations,
we will be required to raise additional capital and/or reduce expenditures
further.
The long-term objective for the Company is to generate sufficient cash
flow to meet its obligations, to obtain additional financing as may be required
to fund future worldwide expansion, and ultimately to attain profitability.
As of December 31, 2001, we had current liabilities of approximately
$12,373,000, which includes, among other items, accounts payable, accrued
expenses and approximately $974,000 due under two credit facilities, with
interest at rates between 7% and 12%. In addition, we will owe minimum
payments on operating leases of approximately $2,001,000 during fiscal 2002.
28
The following table provides the total contractual cash obligations of
the Company:
PAYMENT DUE BY PERIOD
LESS GREATER
THAN THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
----------------------- ----- ------ ----------- ----------- -------
Long-term debt(1) $ 14,681,000 $ 1,817,000 $ 11,526,000 $ 393,000 $ 945,000
Operating leases(2) 5,439,000 2,001,000 2,406,000 1,032,000 -
Unconditional purchase obligations(3) 8,114,000 2,995,000 5,119,000 - -
Convertible subordinated debentures(4) 10,000,000 - 10,000,000 - -
Other long-term obligations(5) 538,000 219,000 319,000 - -
------------------------------------------------------------------------
Total contractual cash obligations $ 38,772,000 $ 7,032,000 $ 29,370,000 $ 1,425,000 $ 945,000
========================================================================
(1) Even though the Company has reflected the disposition of the air
ambulance business as a discontinued operation, until we sell all of the
aircraft we are contractually obligated on the outstanding aircraft
debt. We currently lease a majority of the aircraft to the new operator,
but are responsible for payment on the aircraft. If the operator does not
have sufficient cash flow in order to fund their portion of the monthly
payment, the Company will be responsible for the entire payment.
(2) The Company leases office space, service facilities, and equipment
under operating leases that expire at various times
through April 2006.
(3) The Company has committed to utilize the services of two companies
requiring minimum payments regardless of the amount of services
provided.
(4) In May 2001, the Company issued convertible subordinated debentures
("debentures") totaling $10,000,000. The debentures call for interest
at a rate of 13.75% and mature in May 2004.
(5) The Company has other long-term obligations that expire at various times
through 2004.
Except for our line of credit, the private equity line and commitment for
purchase of the subordinated debentures discussed above, we have no commitments
for additional financings or borrowings. We can provide no assurance that
additional debt or equity financing will be completed, and if completed, will be
on favorable terms. Lower than expected earnings resulting from adverse
conditions or otherwise, could restrict our ability to expand our operations, or
otherwise fully execute our business plan. Management will explore all available
alternatives.
CASH FLOWS
Cash used in operating activities was $27,148,000, $24,589,000 and
$6,627,000 for 2001, 2000 and 1999, respectively. The net cash used during the
year ended December 31, 2001 was primarily attributed to the Company's net
loss of $44,916,000 which included the $2,652,000 write-off of net assets of
discontinued operations, estimated loss on disposal of discontinued operations
of approximately $11,225,000, an increase in accounts receivable of
approximately $4,189,000 offset by an increase in accrued liabilities of
$3,150,000, and after consideration of non-cash depreciation and amortization
expenses of $2,225,000. For the year ended December 31, 2000, the increase was
primarily a result of increased net loss due to costs expended to develop,
implement and market our EHC, loss incurred on sale of a subsidiary, loss from
discontinued operations and write-off of investment in securities. In
addition, the increase was also due to an increase in accounts receivable and
inventory. This increase was partially offset by an increase in amortization
charges as a result of acquisitions, provision for doubtful accounts and
write-off of investment in securities.
Cash provided by (used in) investing activities was $2,339,000,
$(8,586,000) and $(3,442,000) for 2001, 2000 and 1999, respectively. The net
cash provided by investing activities during the year ended December 31, 2001
primarily
29
reflected net proceeds from the sale and purchases of marketable securities
of $1,500,000 and repayment of a related party loan of $1,109,000. For the
year ended December 31, 2000, the increase was primarily the result of
advances made to various officers and directors, advances to a related party
of the subsidiary sold, cash transferred upon sale of subsidiary and increase
in security deposits on new office space.
Cash provided by financing activities was $10,271,000, $36,707,000 and
$21,069,000 for 2001, 2000 and 1999, respectively. The net cash provided by
financing activities during the year ended December 31, 2001 primarily reflected
proceeds from the issuance of convertible subordinated debentures amounting to
$10,000,000. For the year ended December 31, 2000, the increase was primarily
due to funds received from direct sales of the Company's common stock, exercise
of stock options and warrants and remaining proceeds due from issuance of
debentures in December 1999.
Total assets as of December 31, 2001 decreased to $31,229,000 or 47.7%
from December 31, 2000. This decrease was attributable to a reduction in cash as
a result of working capital requirements and write-off of the net assets of the
discontinued Air segment and capital raised from private placements. Total cash
and cash equivalents as of December 31, 2001, decreased to $693,000 from
$15,231,000, in 2000.
Total liabilities increased $10,411,000 or 100% from December 31, 2000.
This increases is primarily due to the issuance of subordinated debentures in
the amount of $10,000,000.
Working capital deficiency, defined as current assets less current
liabilities increased by $29,110,000 from December 31, 2000, primarily resulting
from use of cash to fund operations.
UNCERTAINTY OF FUTURE CAPITAL NEEDS
The capital requirements required to fund the Company's losses, as well
as to continue developing our Electronic HouseCall -Registered Trademark-
System and any other new services are significant. The Company will need to
raise additional funds through public or private offerings, equity or debt
financings or sale of assets in order to fund its losses, continue to develop
our EHC products and system and any other services. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
the current stockholders will be reduced and such equity securities may
possess rights superior to those of the holders of the Company's common stock.
There can be no assurance that additional financing will be available on terms
favorable to the Company or that the Company will be successful in raising
such financing. The Company anticipates that approximately $12,000,000 will be
required to fund its operations during the remainder of 2002. These funds are
expected to be received from cash flows of its service businesses, issuance of
additional convertible debentures and notes, and "Puts" under the private
equity line.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT
The markets for the Company's products and services can be affected by
rapidly changing technology, evolving industry standards, evolving methods of
communications systems, and other factors. Our operating results will depend to
a significant extent on our ability to successfully introduce new products,
software, and services on a timely basis and to reduce the cost of providing
products and services. The success of these new developments includes
identifying proper customer needs, costs, timely completion and introduction,
and the quality of our network, software, and our services as compared to the
Company's competitors and whether our products obtain market acceptance. In
addition, a substantial amount of investment and time is required before the
commercial viability of the Company's products and services is known.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
contingent
30
liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to revenues, bad debts, inventories, investments, income
taxes, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
REVENUE RECOGNITION
The Company generates revenue primarily from the provision of therapy and
related services, the sale of prescription drugs and, to a lesser extent during
2001 and 2000, the sale of technology equipment and related network access fees.
The Company recognizes revenue when services have been rendered or delivery has
occurred, the price of the product or service is fixed or determinable and
collectability is reasonably assured. Additionally, certain of the Company's
2001 EHC-TM- equipment shipments were made to resellers. Given the fact that a
number of the Company's resellers are still relatively new to the tele-health
marketplace and undercapitalized, certain third and fourth quarter shipments
have been recorded as deferred revenue in the accompanying consolidated balance
sheet as of December 31, 2001 pending installation of and payment for these
Units.
The Company bills Medicare and Medicaid for certain of its product sales
and services provided. Medicare and Medicaid reimbursements ("third-party") are
recognized based on allowable charges. The difference between the Company's
established billing rates and contracted or anticipated reimbursement rates is
recorded as a contractual allowance and offset against net revenue. These
revenues are subject to audit and retroactive adjustment by the respective
third-party fiscal intermediaries.
ALLOWANCE FOR CONTRACTUAL ADJUSTMENTS
In order to reduce gross revenue to the estimated net realizable amount
due from certain third-party payors, the Company estimates an allowance for
contractual adjustments in the period the services are rendered. The allowance
for contractual adjustments is reviewed periodically and adjusted in future
periods as final settlements with third-party payors are determined.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts based on
historical collections of accounts receivable. The Company continually monitors
its accounts receivable balances and records a monthly estimate for amounts
determined to be uncollectible. This allowance is adjusted periodically for
actual amounts deemed uncollectible.
EXCESS AND OBSOLETE INVENTORY
The Company writes down excess and obsolete inventory equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future product life-cycles, product demand and market
conditions. If actual product life-cycles, product demand and market conditions
are less favorable than those projected by management, additional inventory
write-downs may be required.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, long-lived assets, including goodwill, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets is measured by
comparison of the carrying amount of the assets to net future undiscounted cash
flows expected to be generated from the assets. No impairment has been
recognized in the accompanying financial statements.
31
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting and Standards Board ("FASB")
issued Statements of Financial Accounting Standards No. 141 ("SFAS 141"),
"Business Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets". SFAS 141 requires that all business combinations initiated
after June 30, 2001 be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method is no longer permitted. SFAS 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment upon initial adoption of the Statement and on an annual
basis going forward. The amortization of goodwill will cease upon adoption of
SFAS 142. The provisions of SFAS 142 will be effective for fiscal years
beginning after December 15, 2001. The Company is required to adopt SFAS 142 in
the first quarter of fiscal year 2002. The Company believes that the adoption of
these standards will have no material impact on its financial statements or
results of operations except for elimination of amortization of Goodwill of
approximately $290,000 per year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 2001, the Company had outstanding $10,000,000
aggregate principal amount of convertible subordinated debentures. Based upon
the closing bid of the Company's common stock on December 31, 2001, of $0.96, as
reported by the National Market of Nasdaq, the fair value of the convertible
subordinated debentures was approximately $9,574,000.
The Company's exposure to market rate risk is limited to interest rate
risk and risks associated with the price of its common stock. The Company's
interest rate risk is limited, since most of the Company's borrowings are at
fixed rates. The Company is subject to risk relating to the price of its
common stock since the majority of the Company's working capital for 2002
will be derived from the issuance of convertible subordinated notes and the
sale of its common stock.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated financial statements and report of
independent certified public accountants thereon appear beginning on Page F-2.
See index to consolidated financial statements on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our current directors and executive officers as of March 30, 2002 are
as follows:
NAME AGE POSITION
---- --- ---------
Joseph R. Forte 47 Chief Executive Officer, President and
Director
Dana Pusateri 49 Executive Vice President and Director
32
Steven M. Cohen 58 Chief Financial Officer
Arthur Kobrin 40 Senior Vice President and Treasurer
Daniel Bivins, Jr. 45 Senior Vice President
Rodger Hochman 42 Senior Vice President and General Counsel
Terry Lazar 58 Director
Alan Adelson 54 Director
Peter Murphy 49 Director
Zachariah P. Zachariah 52 Director
JOSEPH R. FORTE has served as our chief executive officer since
February 2002, as our president since November 2001 and as a director since
October 2001. Prior to joining CyberCare, Inc. Mr. Forte had spent over
18 years addressing market dynamics within Eastman Kodak Company in
leadership and management positions, both domestically and internationally,
as well as focusing on earnings, revenue and share growth. Additionally, he
has been the primary architect of business turnarounds and has led start-up
organizations in digital imaging and healthcare technology. He is a
recognized result-oriented visionary, an innovator in sales, marketing, and
operations, and a role model for values and diversity.
DANA PUSATERI has served as a director since January 1999 and as our
Executive Vice President since 2001. Mr. Pusateri founded IntegraCare, Inc.
in 1988 and served as its chairman, chief executive officer and president,
through November 1995. IntegraCare contracts with skilled nursing facilities,
hospitals and home health agencies to provide physical therapy and
rehabilitation services and owned outpatient clinics. In August 1995,
IntegraCare completed a merger with Integrated Health Services, Inc. In
December 1995, Mr. Pusateri left IntegraCare to pursue other consulting
opportunities and in May 1997, Mr. Pusateri co-founded one of our
subsidiaries, Your Good Health Network, Inc., and currently serves as its
president.
STEVEN M. COHEN has served as our Chief Financial Officer since September
2001. Prior to joining CyberCare, Inc., Mr. Cohen was President of HIP
Healthplan of Florida. Mr. Cohen has over 38 years experience in healthcare
finance and operations.
ARTHUR KOBRIN has served as our senior vice president of financial
operations and Chief Accounting Officer since June 1997 and Treasurer since
January 1, 2001. From August 1987 to June 1997, Mr. Kobrin was employed by
Weinberg, Pershes & Company, P.A.
DANIEL BIVINS, JR. has served as senior vice president and in house
counsel since November 1999, served as Director until March 2002, and in
November 2000, assumed the position of Senior Vice President-Office of the
Chairman. Mr. Bivins was President of Federal Property Management Corporation
and President of Horizon Holding Company from 1993 to 1999.
RODGER L. HOCHMAN has served as senior vice president since
April 2001 and as general counsel since November 2000. Mr. Hochman was
associated with the law firm of Broad and Cassel from 1996 to 2000 and was
associated with the law firm of Tripp Scott Conklin & Smith in Fort Lauderdale,
Florida from 1994 to 1996. He is "Board Certified" as a health lawyer by The
Florida Bar.
TERRY LAZAR has served as an independent director since April 1997. In
1977, Mr. Lazar founded, and is currently senior partner of, Lazar, Sanders,
LLP, a full-service accounting firm specializing in healthcare and other
33
industries.
ALAN ADELSON has served as a consultant to the Company since May 2000,
and as a Director since November 2000. Formerly, Mr. Adelson spent over
twenty-five years on Wall Street in varying capacities including
Managing/Director/Investment Banking for a privately held firm. Mr. Adelson
was formerly Senior Vice President for a mortgage banking company, and former
President of Cambridge Research Corporation, a company that manufactured and
sold products for the handicapped.
PETER MURPHY has served as an independent director since November
2000. For the past five years, Mr. Murphy has been the principal of a firm
specializing in corporate finance with particular focus on emerging business
development.
ZACHARIAH P. ZACHARIAH, M.D. has served as an independent director since
April 2001. Dr. Zachariah has been the Director of Cardiology since 1995 and
Director of Cardiovascular Laboratories since 1976 at Holy Cross Hospital, Fort
Lauderdale, Florida and a Professor of Medicine, University of Miami School of
Medicine, Miami, Florida since 1984. He also serves as First Vice President,
Florida Board of Medicine and Vice Chairman to the Florida Council on Economic
Education. He is also a former chairman of the Florida Board of Medicine.
Our officers are appointed annually by the Board of Directors and serve
at the discretion of the Board. Our directors hold office on a staggered basis
on terms of one to three years. Messrs. Lazar and Murphy are members of the
audit committee, and Messrs. Lazar and Pusateri are members of the compensation
committee. There are no family relationships among our directors and executive
officers.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors and persons who own more than ten percent of our common
stock to file with the SEC initial reports of ownership on Form 3 and reports of
changes in ownership of our common stock and other equity securities on Form 4
and/or Form 5. To our knowledge, based solely on review of the copies of such
reports furnished to us, and representations that no other reports were
required, during the year ending December 31, 2001, all Section 16(a) filing
requirements were complied with except that reports for the following executives
officers and directors were not filed timely;
John Haines, an officer of the Company who resigned during 2001,
failed to timely file one Form 4 reporting eight transactions during 2001.
Arthur Kobrin failed to timely file one Form 4 reporting one transaction
during 2001. Dana Pusateri failed to timely file one Form 4 reporting one
transaction. Terry Lazar failed to timely file two Form 4s reporting two
transactions during 2001. Zachariah P. Zachariah, M.D. failed to timely file
one Form 4 reporting seven transactions. Theordore Orlando failed to timely
file one Form 4 reporting ten transactions during 2001. All Form 4s have been
subsequently filed.
ITEM 11. EXECUTIVE COMPENSATION
The following table displays information concerning compensation paid or
accrued for the years ended December 31, 2001, 2000 and 1999, for the benefit of
our named executive officers. Each of the named executive officers received
other personal benefits in amounts less than 10% of their total annual salary
and bonus.
34
SUMMARY OF COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
------------------- -----------------------------
NAME & RESTRICTED SECURITIES ALL OTHER
PRINCIPAL YEAR SALARY BONUS STOCK UNDERLYING COMPENSATION
POSITION ($) ($) AWARD(S) OPTIONS/WARRANTS ($)
----------------------------------------------------------------------------------------------------------
Joseph R. Forte 2001 $ 154,663 1,000,000
President, CEO and 2000 - -
Director 1999 - -
Michael F. Morrell* 2001 $ 284,999 500,000
Former Chairman, CEO 2000 $ 337,241 650,000
and Director 1999 $ 225,526 1,000,000
Dana Pusateri 2001 $ 191,993 550,000
Chief Operating 2000 $ 197,745 400,000
Officer and Director 1999 $ 107,500 500,000
Rodger Hochman 2001 $ 172,383 100,000
Senior Vice President 2000 $ 19,848 75,000
And General Counsel 1999 $ - -
Daniel Bivins, Jr. 2001 $ 162,913 425,000
Senior Vice President 2000 $ 119,577 100,000
1999 $ 45,192 100,000
Paul C. Pershes 2001 $ 225,246 400,000
Former President, 2000 $ 268,803 300,000
Former Director 1999 $ 198,077 400,000
John E. Haines 2001 $ 276,545 350,000
Former Senior Vice 2000 $ 171,634 300,000
President, Former 1999 $ 79,038 300,000
Director
Linda Moore* 2001 $ 143,009 350,000
Former Senior Vice 2000 $ 152,616 150,000
President & Secretary 1999 $ 117,884 350,000
* Mr. Morrell and Ms. Moore left the Company in February 2002.
Mr. Forte was granted in April 2001, 125,000 options which expire in
five years from the date of grant to purchase common stock at $2.14 per
share. In June 2001, the Board of Directors granted Mr. Forte 150,000
options to purchase common stock at $1.49 per share, in August 2001,
granted 125,000 options to purchase common stock at $0.75 per share, and in
November 2001, was granted 600,000 options to purchase common stock at
$0.97 per share.
Mr. Morrell was granted in September 1999, 1,000,000 options which
expire in five years from the date of grant, to purchase common stock at
$1.00 per share, all of which have been exercised. In August 2000, the
Board of Directors granted Mr. Morrell 650,000 options to purchase common
stock at $4.78 per share, which are all currently outstanding; and in
August 2001 granted 500,000 five-year options to purchase common stock at
$0.75 per share which expire in five years from the date of grant.
35
Mr. Pusateri was granted in September 1999, 500,000 options which
expire in five years from the date of grant, to purchase common stock at
$1.00 per share, all of which are currently outstanding. The Board of
Directors in August 2000, granted Mr. Pusateri 400,000 options to purchase
common stock at $4.78 per share, which are all currently outstanding. In
March 2001, Mr. Pusateri was granted 350,000 five-year options to purchase
common stock at $2.62 per share, which are all outstanding and in August
2001 was granted 200,000 five-year options to purchase common stock at
$0.75 per share.
Mr. Hochman was granted in November 2000, 75,000 options which expire
in five years from the date of grant, to purchase common stock at $4.50 per
share, 25,000 have vested under an employment agreement. In August 2001,
the Board of Directors granted Mr. Hochman 100,000 five-year options to
purchase common stock at $0.75 per share.
Mr. Bivins was granted in November 1999, 100,000 options which expire
in five years from the date of grant, to purchase common stock at $1.81 per
share, 66,667 have vested. In August 2000, the Board of Directors granted
Mr. Bivins 100,000 options to purchase common stock at $4.78 per share, all
of which are currently outstanding; in March 2001 was granted 300,000
options to purchase common stock at $3.00 per share, all of which are
currently outstanding and in August 2001, was granted 125,000 options to
purchase common stock at $0.75 per share.
Mr. Pershes was granted in September 1999, 400,000 options which
expire in five years from the date of grant, to purchase common stock at
$1.00 per share, 200,000 of which have been exercised. The Board of
Directors granted Mr. Pershes in August 2000, 300,000 five-year options to
purchase common stock at $4.78 per share, which are all currently
outstanding; and in March 2001, was granted 400,000 options to purchase
common stock at $2.62 per share of which 133,334 are currently outstanding.
Mr. Haines was granted in August 1999, 200,000 nonqualified options to
purchase common stock at $1.75 per share. All have vested, under his
employment agreement. In September 1999, the Board of Directors granted Mr.
Haines 100,000 options which expire in five years from the date of grant,
to purchase common stock at $1.00 per share, 75,000 of which are currently
outstanding; in August 2000 was granted 300,000 options to purchase common
stock at $4.78 per share, of which 100,000 options are outstanding. In
March 2001, Mr. Haines was granted 350,000 options to purchase common stock
at $2.62 per share of which 116,667 options are currently outstanding.
Ms. Moore was granted 350,000 options to purchase common stock at
$1.00 per share, 175,000 of which have been exercised and in August 2000
was granted 150,000 five-year options to purchase common stock at $4.78 per
share, which are all currently outstanding. In March 2001, the board of
directors granted Ms. Moore 250,000 options to purchase common stock at
$2.62 per share, which are all currently outstanding; and in August 14,
2001 was granted 100,000 five-year options to purchase common stock at
$0.75 per share.
The following tables show, as to the named executive officers, certain
information concerning stock options:
36
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER PERCENT OF
OF TOTAL
SECURITIES OPTIONS/SARS POTENTIAL POTENTIAL POTENTIAL
UNDERLYING GRANTED TO REALIZABLE REALIZABLE REALIZABLE
OPTIONS/ EMPLOYEES EXERCISE OF VALUE AT VALUE AT VALUE AT
SARS IN FISCAL BASE PRICE EXPIRATION ANNUALIZED ANNUALIZED ANNUALIZED
NAME GRANTED YEAR ($/SHARE) DATE RATE 0% RATE 5% RATE 10%
------ ------- ---- ----------- ---- ---------- ---------- ----------
Joseph R. Forte 125,000 1.6% $0.75 8/14/06 $ 25,901 $ 57,235
600,000 7.6% $0.97 11/27/06 $ 160,706 $ 355,317
150,000 1.9% $1.49 6/19/06 $ 61,749 $ 136,449
125,000 1.6% $2.14 4/9/06 $ 73,905 $ 163,311
Michael F. Morrell* 500,000 6.3% $0.75 8/14/06 $ 103,606 $ 228,941
Dana Pusateri 200,000 2.5% $0.75 8/14/06 $ 41,442 $ 91,577
350,000 4.4% $2.62 3/14/06 $ 1,750 $ 255,584 $ 562,656
Rodger Hochman 100,000 1.3% $0.75 8/14/06 $ 20,721 $ 45,788
Daniel Bivins, Jr. 125,000 1.6% $0.75 8/14/06 $ 25,901 $ 57,235
300,000 3.8% $3.00 3/12/06 $ 248,653 $ 549,459
Paul C. Pershes* 400,000 5.1% $2.62 11/9/02 $ 2,000 $ 109,625 $ 222,500
John E. Haines* 350,000 4.4% $2.62 6/26/02 $ 1,750 $ 47,688 $ 93,625
Linda Moore* 100,000 1.3% $0.75 8/14/06 $ 20,721 $ 45,788
250,000 3.2% $2.62 3/14/06 $ 1,250 $ 182,560 $ 401,897
* These individuals have resigned from the Company. Upon their
resignations, these options may not have been retained by the individuals.
With respect to the options granted to the officers described immediately
above:
AGGREGATED OPTIONS EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
SHARES
ACQUIRED VALUE NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN THE
NAME ON EXERCISE REALIZED UNEXERCISED OPTIONS AT FY-END (#) MONEY OPTIONS
---- ----------- -------- --------------------------------- -------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Joseph Forte 395,834 604,166 $ - $ 26,250
Michael Morrell - - 1,211,667(A) 1,033,333 $ 89,700 $ 126,000
Dana Pusateri - - 958,334 591,666 $ 15,750 $ 47,250
Rodger Hochman - - 25,000 150,000 $ - $ 21,000
Daniel Bivins, Jr. - - 233,334 391,666 $ - $ 26,250
Paul C. Pershes - - 875,000 - $ 80,500 $ -
John E. Haines - - 491,667 - $ - $ -
Linda Moore - - 1,211,667(A) 1,033,333 $ 89,700 $ 126,000
(A) Mr. Morrell and Ms. Moore are married and under the rules of beneficial
ownership, we have combined their securities.
The table above includes both warrants and options. The value of
unexercised in-the-money warrants and options was computed based on the
differences between the closing market price of $0.96, as of Monday,
December 31, 2001, and the aggregate exercise prices of the warrants and
options.
37
EMPLOYMENT AGREEMENTS
AGREEMENT WITH JOSEPH FORTE
In March 2001, and subsequently amended in November 2001, the Company
entered into an employment agreement with Joseph Forte, expiring November 2005,
which provides for an annual base salary, payment of normal business expenses,
bonuses and stock options as determined by the board of directors.
AGREEMENT WITH MICHAEL MORRELL
In January 1997 and as amended December 6, 2001, the Company entered into
an employment agreement with Michael Morrell expiring December 31, 2005, which
provides for an annual base salary, payment of normal business expenses, bonuses
and stock options as determined by the board of directors. Mr. Morrell resigned
from the Company effective February 6, 2002.
AGREEMENT WITH DANA PUSATERI
In October 1998, the Company entered into an employment agreement with
Dana Pusateri, expiring in October 2002, which provides for an annual base
salary, payment of normal business expenses, bonuses and stock options as
determined by the board of directors.
AGREEMENT WITH RODGER HOCHMAN
In November 2001, the Company entered into an employment agreement with
Rodger Hochman expiring in November 2002, which provides for an annual base
salary, payment of normal business expenses, bonuses and stock options as
determined by the board of directors.
AGREEMENT WITH DANIEL BIVINS, JR.
In November 1999, the Company entered into an employment agreement with
Daniel Bivins expiring in February 2003, which provides for an annual base
salary, payment of normal business expenses, bonuses and stock options as
determined by the board of directors.
AGREEMENT WITH PAUL C. PERSHES
In January 1997, the Company entered into an employment agreement with
Paul C. Pershes expiring in January 2002, which provides for an annual base
salary, payment of normal business expenses, bonuses and stock options as
determined by the board of directors. Mr. Pershes resigned from the Company
effective September 7, 2001.
Effective September 10, 2001, the Company entered into a separation and
severance agreement with Paul Pershes which calls for total compensation to be
paid through December 2004, in the approximate amount of $732,000.
38
AGREEMENT WITH JOHN E. HAINES
In July 1999, the Company entered into an employment agreement with John
Haines as senior vice president in charge of technology and effective September
1, 1999 as president of our subsidiary, CyberCare Technologies. The agreement
expires in July 2002 and provides for an annual base salary, payment of normal
business expenses, bonuses and stock options as determined by the board of
directors. Mr. Haines resigned from the Company effective June 26, 2001.
Effective June 29, 2001, the Company entered into a separation and
severance agreement with John Haines, which calls for total compensation to be
paid through June 2002, in the approximate amount of $205,000.
AGREEMENT WITH LINDA MOORE
In November 1996, the Company entered into an employment agreement with
Linda Moore expiring in November 2003, which provides for an annual base salary,
payment of normal business expenses, bonuses and stock options as determined by
the board of directors. Ms. Moore's employment with the Company ended effective
February 28, 2002.
The Company is currently reviewing all of the executive employment agreements
including their severance and termination provisions.
COMPENSATION OF OUTSIDE DIRECTORS
The following table shows all compensation paid to outside directors:
CASH COMPENSATION SECURITY GRANTS
----------------- ---------------
NUMBER OF
ANNUAL CONSULTING NUMBER SECURITIES
RETAINER MEETING FEE / OTHER OF UNDERLYING
NAME FEE ($) FEES ($) FEES ($) SHARES (#) OPTIONS/SARS (#)
---- ------- -------- -------- ---------- ----------------
Terry Lazar - 1,000 23,000 - 300,000
Alan Adelson - - 114,000 - 450,000
Theodore J. Orlando* - 1,000 - - 300,000
Peter Murphy - - - - 550,000
Zachariah P. Zachariah, M.D. - - - - 450,000
* Mr. Orlando resigned from the Board of Directors in March 2002.
The board of directors had 20 meetings during 2001, of which 19 were
telephonic meetings. Outside directors receive $1,000 for each meeting they
attend, up to a maximum of $5,000. Both inside and outside directors may be
awarded stock options for other meetings and work performed.
LIMITATION OF DIRECTORS' LIABILITY
Our amended and restated articles of incorporation eliminate, to the
fullest extent permitted by Florida law, the personal liability of our directors
for monetary damages for breaches of fiduciary duty. However, our amended and
restated articles of incorporation do not provide for the elimination or
limitation of the personal liability of a director for acts or omissions that
involve intentional misconduct, fraud, or a knowing violation of the law, or
unlawful corporate distributions. These provisions will limit the remedies
available to the stockholder who is dissatisfied with a decision of the board of
directors protected by these provisions, and the stockholder's only remedy may
be to bring a suit to prevent the action of the board. This remedy may not be
effective in many situations because stockholders are often unaware of a
transaction or an event before the board's action. In these cases, our
stockholders and our Company could be injured by a board's decision and have no
effective remedy.
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below displays, as of March 31, 2002 the beneficial ownership
of our common stock by
- our directors;
- our named executive officers;
- the holders of five percent or more of our common stock; and
- our directors and officers as a group.
NUMBER OF SHARES OF PERCENTAGE
NAME AND BUSINESS ADDRESS COMMON STOCK BENEFICIALLY OWNED OF CLASS
------------------------- ------------------------------- --------
Joseph Forte 506,867 less than 1%
Dana Pusateri 1,920,533 2.2%
Steven M. Cohen 100,981 less than 1%
Arthur Kobrin 484,378 less than 1%
Rodger Hochman 105,065 less than 1%
Daniel Bivins, Jr. 338,334 less than 1%
Terry Lazar 566,667 less than 1%
100 Jericho Quadrangle, Suite 127
Jericho, NY 11753-2702
Alan Adelson 334,541 less than 1%
Peter Murphy 393,334 less than 1%
2000 Pennsylvania Avenue
Wilmington, DE 19806
Zachariah P. Zachariah, M.D. 166,667 less than 1%
Director of Cardiology
Cardiovascular Laboratory
4725 N. Federal Hwy.
Ft. Lauderdale, FL 33308
Anthony Tang 5,813,179 6.7%
936 E. Green St., Suite 108
Pasadena, CA 91106
Angela Sabella 5,278,313 6.1%
853 E. Valley Blvd., Suite 200
San Gabriel, CA 91776
All Directors, Officers and other 5% ---------- -----------
beneficial owners as a group (12 persons) 16,008,859 18.5%
==========
40
Except as otherwise stated, the business address of each of the
beneficial owners is 2500 Quantum Lakes Drive, Suite 1000, Boynton Beach,
Florida 33426.
We have determined beneficial ownership following the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, we have included the shares of common stock
subject to options and warrants held by that person that are currently
exercisable or will become exercisable within 60 days after March 31, 2002 but
we have not included those shares for purposes of computing the percentage
ownership of any other person. We have assumed, unless indicated below that the
persons and entities named in the table have sole voting and investment power
for all shares beneficially owned subject to applicable community property laws.
The shares of common stock beneficially owned by Mr. Kobrin include
75,000 shares received in 1998 and 200,000 shares in 1999 upon the exercise of
options to purchase shares of common stock of aggregate exercise prices of
$354,250. Upon the exercise of those options, Mr. Kobrin issued the Company a
promissory note in payment for the shares, which note contained the following
terms: (1) repayment of principal with interest at the Federal applicable rate,
(2) pledge of the shares as collateral security for repayment of the loan, and
(3) repayment of the principal and interest upon the earlier to occur of the
sale of the shares in 2004. In February 2000, Mr. Kobrin repaid $93,750 of the
note by tendering 4,688 common shares to the Company.
The shares of common stock beneficially owned by Mr. Tang include
1,454,305 shares of the Company's common stock and 500,000 stock purchase
warrants owned by Manford Investments, LLC and 1,025,000 shares that Mr. Tang
has the right to acquire upon exercise of stock purchase warrants. These figures
were obtained from Schedule 13G filed by Mr. Tang on February 5, 2002. Mr. Tang
is the control person for Manford Investments, LLC. As disclosed in that filing,
Mr. Tang has disclaimed beneficial ownership of any shares beneficially owned by
his spouse Angela C. Sabella, C.C. Fortune Ventures, LLC and View Far Ltd. as
reported in Schedule 13G filed on July 2, 2001 by such persons. In addition,
Mr. Tang purchased in June 2001 and September 2000, 825,000 and 60,000 shares of
the Company's common stock, by issuing promissory notes in payment for a the
shares, which the notes contain the following terms: (1) repayment of principal
with interest at 1% per annum, (2) pledge of the shares as collateral security
for repayment of the loan, and (3) repayment of the principal and interest on or
before June 2004 and September 15, 2003, respectively. These notes and
collateral were assigned by Mr. Tang to an affiliated entity of Mr. Tang in
February 2002. These figures do not include 615,385 shares of the Company's
Common Stock issuable upon conversion of various subordinated debentures.
The shares of common stock beneficially owned by Ms. Sabella include
1,658,068 shares of the Company's common stock and 1,450,000 stock purchase
warrants owned by View Far Ltd., 100,000 shares that Ms. Sabella has the right
to acquire upon exercise of stock purchase warrants, 1,500,000 stock purchase
warrants owned by C.C. Fortune Ventures, LLC, and 228,782 shares of the
Company's common stock that Ms. Sabella is attorney in fact. These figures were
obtained from Schedule 13G filed by Ms. Sabella in July 2001. Ms. Sabella is the
control person of C.C. Fortune Ventures, LLC. These figures do not include
7,461,538 shares of the Company's Common Stock issuable upon conversion of
various subordinated debentures.
The beneficial ownership of the persons in the table above includes the
following options or warrants to purchase shares of our common stock that are
currently exercisable or may be exercised by the person within 60 days of
March 31, 2002.
41
SECURITIES EXERCISABLE WITHIN 60 DAYS
OPTIONS/WARRANTS EXERCISE PRICE
------------------ --------------
Joseph Forte ..................................... 500,002 $ .50 - $2.14
Dana Pusateri .................................... 1,075,000 $ .75 - $4.78
Steven M. Cohen .................................. 100,000 $ 1.10
Rodger Hochman.................................... 100,000 $ .50 - $4.50
Arthur Kobrin ................................... 168,333 $ .50 - $4.78
Daniel Bivins, Jr. ............................... 333,334 $ 1.81 - $4.78
Terry Lazar ...................................... 441,667 $ 1.22 - $2.62
Alan Adelson ..................................... 300,000 $ 2.62 - $4.00
Peter Murphy ..................................... 393,334 $ 1.78 - $4.00
Zachariah P. Zachariah, M.D. ..................... 166,667 $ 1.78
Anthony Tang ..................................... 1,525,000 $ 1.25 - $5.00
Angela Sabella ................................... 3,050,000 $ 1.25 - $18.44
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to loans discussed in Item 12, the Company had the following
related party transactions in which the individual amount exceeded $60,000.
In April 2001, the Company loaned Michael Morrell, Paul Pershes, Linda
Moore, and Arthur Kobrin an aggregate amount of $385,000 evidenced by various
non-recourse notes, which call for interest at the applicable federal rate. The
notes mature on March 31, 2003. The loans are collateralized by Company common
shares owned by the officers with a floor price of $4.00 per share. During 2001,
Arthur Kobrin has repaid the balance of his note in the amount of $27,500 plus
accrued interest of the outstanding balance.
During 2001 and 2000, the Company paid one of its directors $114,000 and
$62,500, respectively, for consulting services.
During 2001 and 2000, the Company paid one of its directors $23,000 and
$26,683, respectively, for tax services.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are to be filed as part of this Form 10-K:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
2 Purchase Agreement by and among AIM Aircraft, Inc. and CyberCare, Inc. Air
Response Medical Corp., Global Air Rescue, Global Air Charter, Inc., and Air
Response North, Inc.
3.1 Amended and Restated Articles of Incorporation. Incorporated by reference from
the exhibit with the same reference number in our Registration Statement.
42
3.2 Amended and Restated Bylaws. Incorporated by reference from the exhibit with the
same reference number in our Registration Statement.
3.3 Articles of Amendment to the Articles of Incorporation. Previously filed as an
exhibit, with the same reference number, to our Registration Statement on
Form S-3, which was filed on February 11, 2000.
4.1 Non-qualified Stock Option Agreement between Cyber-Care, Inc. and John E. Haines
dated August 26, 1999. Previously filed as an exhibit, with the same ended
reference number to a Form S-8 dated February 13, 2002.
4.3 Non-qualified Stock Option Agreement between Cyber-Care, Inc. and Stephen N.
Xenakis dated June 11, 2001. Previously filed as an exhibit, with the same
reference number to a Form S-8 dated February 13, 2002.
4.4 Non-qualified Stock Option Agreement between Cyber-Care, Inc. and Vince Colwell
dated August 1, 1999. Previously filed as an exhibit, with the same
reference number to a Form S-8 dated February 13, 2002.
10.1 Form of Indemnification Agreement between the Registrant and each of its
directors and certain executive officers. Incorporated by reference from the
exhibit with the same reference number in our Registration Statement.
10.14.1 Employment Agreement - Paul C. Pershes. Previously filed as an exhibit, with
same reference number to our period ended Annual Report on Form 10-QSB for
the March 31, 1997.
10.15 Employment Agreement - Michael Morrell. Previously filed as an exhibit, with the
same reference number, to our Annual Report on Form 10-KSB for the year
ended December 31, 1996.
10.16 Employment Agreement - Arthur Kobrin. Previously filed as an exhibit, with the
same reference number, to our Annual Report on Form 10-KSB for the year ended
December 31, 1997.
10.17 Employment Agreement - Linda Moore. Employment Agreement. Previously filed as an
exhibit, with the same reference number, to our Annual Report on Form 10-KSB
for the year ended December 31, 1997.
10.18 Share Exchange Agreement between MIOA Acquisition Company I, Inc. and Global Air
Rescue, Inc. Previously filed as an exhibit, with the same reference number,
to a Form 8-K dated January 6, 1998.
10.19 Share Exchange Agreement between MIOA Acquisition Company I, Inc. and Global Air
Charter, Inc. Previously filed as an exhibit, with the same reference
number, to a Form 8-K dated January 6, 1998.
10.20 Share Exchange Agreement between MIOA Acquisition Company I, Inc. and Clearwater
Jet Center, Inc. Previously filed as an exhibit, with the same reference
number, to a Form 8-K dated January 6, 1998.
10.22 Employment Agreement by and between Medical Industries of America, Inc. and John
E. Haines. Previously filed as an exhibit to a Form 8-K dated July 15, 1999.
10.23 Amendment No. 1 to the Employment Agreement by and between Medical Industries of
America, Inc. and John E. Haines. Previously filed as an exhibit to a
Form 8-K dated July 15, 1999.
10.24 Agreement of Purchase and Sale by and between HELP Innovations, Inc., HELP
Innovations Acquisition Corp., Inc., Cyber-Care, Inc. and Linda L. Roman and
Innovative Health of Kansas, Inc. Previously filed as an exhibit, with the
same reference number, to our
43
Registration Statement on Form S-3, which was filed on February 11, 2000.
10.25 Agreement and Plan of Merger by and among Medical Industries of America, Inc.,
MIOA Acquisition Company IV, Inc., Your Good Health Network, Inc., and
Dr. David Vastola, Dana Pusateri, Dr. Martin Santiago, Juan Cocuy, Irma
Espinoza, Randy Davis, Elaine Callendrillo, Lydia Torregrosa-Greber, Richard
Hoffman and Eric Conn. Previously filed as an exhibit, with the same
reference number, to our Registration Statement on Form S-3, which was filed
on February 11, 2000.
10.26 Stock Exchange Agreement between Medical Industries of America, Inc. and
CyberCare, Inc. Previously filed as an exhibit to a Form 8-K dated
July 15, 1999.
10.27.1 Stock Purchase Agreement by and among Cyber-Care, Inc., MIOA Acquisition Corp.
I, Air Response North, Inc., Global Air Charter, Inc., Global Air Rescue,
Inc. and Air Response Medical Transport Corp. and Lous R. Capece,
Jr. Previously filed as an exhibit to Form 8-K dated October 2, 2000.
10.28 Letter of Agreement between Business Management Partners, Inc. and CyberCare,
Inc. dated August 15, 2001. Previously filed as an exhibit to a Form S-3/A
dated December 17, 2001.
10.29 Settlement Agreement by and among CyberCare Technologies, Inc., CyberCare,Inc.,
CardioCommand, Inc., and Maynard Ramsey III dated November 13, 2001.
Previously filed as an exhibit to a Form S-3/A dated December 17, 2001.
10.30 Letter Agreement between Raymond James & Associates, Inc., CyberCare, Inc. and
CyberCare Technologies, Inc. dated October 12, 2001. Previously filed as an
exhibit to a Form S-3/A dated December 17, 2001.
10.31 Letter of Agreement between Syzex Corporation and CyberCare Technologies, Inc.
dated September 25, 2001. Previously filed as an exhibit to a Form S-3/A
dated December 17, 2001.
10.32 Letter Agreement between Thomas, Kayden, Horstemeyer Risely, L.L.P. and
CyberCare, Inc. dated September 11, 2001. Previously filed as an exhibit to
a Form S-3/A dated December 17, 2001.
10.33 Assignment Agreement between Jeff Spetalnick and CyberCare, Inc. dated
April 28, 2001. Previously filed as an exhibit to a Form S-3/A dated
December 17, 2001.
10.34 Assignment Agreement between Integrated Management Group, Inc. and CyberCare,
Inc. dated August 9, 2000. Previously filed as an exhibit to a Form S-3/A
dated December 17, 2001.
10.35 Assignment Agreement between Joongeun Park and CyberCare, Inc. dated
May 15, 2001. Previously filed as an exhibit to a Form S-3/A dated
December 17, 2001.
10.36 Letter Agreement between Tri Cap Securities Inc. and CyberCare, Inc. dated
September 12, 2001. Previously filed as an exhibit to a Form S-3/A dated
December 17, 2001.
10.37 Marketing, Distribution and License Agreement by and among CyberCare
Technologies, Inc., CyberCare International Ltd., and CyberAmeriCare, Inc.
dated October 11, 2001. Previously filed as an exhibiat to a Form 8-K dated
October 15, 2001.
10.38 Amendment to Marketing, Distribution and License Agreement between CyberCare
Technologies, Inc., CyberCare International Limited, and CyberAmeriCare,
Inc. dated December 27, 2001. Previously filed as an exhibit to a Form 8-K
dated January 16, 2002.
44
10.39 Purchase Agreement by and among AIM Aircraft, Inc. and CyberCare, Inc., Air
Response Medical Transport Corp., Global Air Rescue, Inc., Global Air
Charter, Inc., and Air Response North, Inc. dated October 19, 2001.
Previously filed as an exhibit to a Form 8-K dated December 18, 2001.
10.40 Private Equity Line Agreement by and between Strategic Investment Management SA
and CyberCare, Inc. dated as of September 14, 2001. Previously filed as an
exhibit to a Form S-3A dated December 17, 2001.
14D Financial Statement Schedules
21.1 List of Subsidiaries Filed herewith
23 Consent of Ernst & Young LLP filed herewith
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authoriorized.
Dated: April 15, 2002 CYBER-CARE, INC.
By: //s// JOSEPH R. FORTE
---------------------
Joseph R. Forte
Chief Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
//s// STEVEN M. COHEN Chief Financial April 15, 2002
Steven M. Cohen Officer
//s// DANA PUSATERI Executive Vice April 15, 2002
Dana Pusateri President and
Director
//s// ALAN ADELSON Director April 15, 2002
Alan Adelson
//s// TERRY LAZAR Director April 15, 2002
Terry Lazar
//s// PETER MURPHY Director April 15, 2002
Peter Murphy
//s// ZACHARIAH P. ZACHARIAH, M.D. Director April 15, 2002
Zachariah P. Zachariah
45
46
CyberCare, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Page
----
Report of Independent Certified Public Accountants ....................... F-2
Consolidated Balance Sheets .............................................. F-3
Consolidated Statements of Operations .................................... F-4
Consolidated Statements of Stockholders' Equity .......................... F-5
Consolidated Statements of Cash Flows .................................... F-7
Notes to Consolidated Financial Statements ............................... F-10
F-1
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
CyberCare, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of CyberCare,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. Our audits also
included the financial statement schedules listed in the index at Item 14a.
These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CyberCare, Inc.
and subsidiaries at December 31, 2001 and 2000, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses,
operating cash flow deficiencies and has a working capital deficiency. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
Ernst & Young LLP
West Palm Beach, FL
March 1, 2002
F-2
CYBERCARE, INC. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 31,
2001 2000
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 693 $ 15,231
Cash - restricted 373 -
Marketable securities - 1,500
Trade accounts receivable, less allowance for doubtful
accounts of $1,859 (2001) and $1,496 (2000) 4,293 2,572
Net assets of discontinued operations - 8,687
Inventories, net 2,599 5,242
Notes receivable - related parties, less allowance to reduce
to realizable value of $604 (2001) and $231 (2000) 228 2,280
Notes and interest receivable 1,164 1,294
Other current assets 867 369
--------- ---------
Total current assets 10,217 37,175
Property and equipment, net 2,439 2,072
Goodwill, net 5,085 5,760
Licenses, net 9,992 11,282
Notes receivable 2,455 2,725
Other assets 1,041 719
--------- ---------
Total assets $ 31,229 $ 59,733
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,015 $ 2,933
Accrued liabilities 5,724 3,859
Lines of credit 974 1,993
Net liabilities of discontinued operations 1,660 1,250
Deferred revenue 746 -
Other current liabilities 254 186
--------- ---------
Total current liabilities 12,373 10,221
Convertible subordinated debentures, net of discounts of
$1,924 at December 31, 2001 8,076 -
Other liabilities 361 178
--------- ---------
Total liabilities 20,810 10,399
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, 20,000,000 shares authorized; 19,800,000 shares
available for issuance - -
Common stock, $0.0025 par value, 200,000,000 shares authorized;
67,827,992 and 64,775,282 shares issued and outstanding at
December 31, 2001 and 2000, respectively 170 162
Capital in excess of par 127,055 120,224
Stock subscriptions receivable (4,740) (3,903)
Accumulated other comprehensive income - 1
Accumulated deficit (112,066) (67,150)
--------- ---------
Total stockholders' equity 10,419 49,334
--------- ---------
Total liabilities and stockholders' equity $ 31,229 $ 59,733
========= =========
See Notes to Consolidated Financial Statements.
F-3
CYBERCARE, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
Year ended December 31,
2001 2000 1999
---- ---- ----
Net sales $ 18,241 $ 19,320 $ 16,844
------------ ----------- -----------
Costs and expenses:
Cost of services 15,777 12,702 7,754
Selling, general and administrative 17,626 16,944 9,413
Research and development 13,128 9,312 349
Depreciation and amortization 2,225 1,984 822
(Gain) loss on sale of subsidiaries (92) 1,323 (1,256)
Non-recurring severance and settlement costs 2,897 - -
------------ ----------- -----------
Total costs and expenses 51,561 42,265 17,082
------------ ----------- -----------
Operating loss (33,320) (22,945) (238)
------------ ----------- -----------
Other income (expense):
Interest income 1,264 1,859 93
Interest expense (1,089) (541) (1,283)
Amortization of beneficial conversion feature and discount (546) (657) (8,572)
Write-off of investment in securities - (2,425) -
------------ ----------- -----------
Total other expense, net (371) (1,764) (9,762)
------------ ----------- -----------
Loss from continuing operations (33,691) (24,709) (10,000)
Discontinued operations:
Loss from operations of discontinued businesses - (1,627) (118)
Estimated loss on disposal of discontinued businesses (11,225) (2,362) (690)
------------ ----------- -----------
Net loss $ (44,916) $ (28,698) $ (10,808)
============ =========== ===========
Loss per common share - basic and diluted:
Loss from continuing operations $ (0.51) $ (0.40) $ (0.30)
Discontinued operations (0.17) (0.07) (0.03)
------------ ----------- -----------
Net loss $ (0.68) $ (0.47) $ (0.33)
============ =========== ===========
Weighted average common shares outstanding 65,670,673 61,147,042 32,882,376
============ =========== ===========
See Notes to Consolidated Financial Statements.
F-4
CYBERCARE, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
ACCUMULATED
STOCK OTHER
CAPITAL IN SUBSCRIPTION COMPREHENSIVE
PREFERRED STOCK COMMON STOCK EXCESS OF PAR RECEIVABLE INCOME (LOSS)
--------------- ------------ ------------- ---------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Balance - December 31, 1998 21,591 $ 216 23,352,924 $ 59 $ 38,915 $ (1,050) $ -
Repurchase of preferred stock (21,591) (216) - - - - -
Common stock and
warrants issued for
Acquisitions - - 12,583,293 31 14,399 - -
Conversion of debentures - - 7,904,668 20 5,228 - -
Common stock issued for
services and interest expense - - 640,777 2 558 - -
Common stock received as
consideration for sale of
Subsidiary - - (1,598,842) (4) (2,800) - -
Common stock issued upon
exercise of stock options
and warrants - - 5,738,045 14 5,682 (3,605) -
Interest-beneficial conversion
feature - - - - 8,572 - -
Fair market value of detachable
warrants issued with
subordinated debentures - - - - 9,034 - -
Common stock issued to
repay long-term debt - - 118,223 - 71 - -
Common stock issued to
settle lawsuit - - 296,000 1 151 - -
Common stock issued through
employee stock purchase plan - - 6,239 - 28 - -
Unrealized loss on investment
in equity securities - - - - - - (1,768)
Net loss - - - - - - -
Comprehensive loss
Common stock returned upon
employee separation - - (386,667) (1) (289) - -
------- ------- ---------- ------- ---------- --------- ----------
Balance - December 31, 1999 - - 48,654,660 122 79,549 (4,655) (1,768)
Common stock returned by
officers to repay stock
subscription receivable - - (133,225) (1,638) 1,638 -
Conversion of debentures - - 8,985,941 22 16,152 - -
Reclass of deferred financing
costs upon conversion of
debentures - - - - (6,174) - -
Common stock issued under
earn out arrangement - - 70,942 - 332 - -
Exercise of warrants and stock
options - cash - - 5,533,516 14 5,079 - -
Common stock issued in
exchange for stock
subscription receivable - - 60,000 - 360 (360) -
Exercise of warrants and stock
options - non-cash - - 126,669 - 526 (526) -
Common stock issued for
services rendered - - 29,091 - 141 - -
Common stock received on
payoff of note - - (35,371) - (163) - -
Shares issued to settle lawsuit 75,000 - 159 -
Common stock issued to
repay long-term debt - - 51,000 - 607 - -
Sale of common stock - - 1,795,546 5 27,489 - -
Fair market value of warrants
issued for consulting services - - - - 368 - -
Write-off of investment in
Westmark Group Holdings - - - - - - 1,768
Common stock issued to
purchase domain name - - 15,000 101 - -
Repurchase of common stock - - (117,900) (344) - -
Common stock issued under
employee stock purchase plan - - 10,334 79 - -
Stock returned as partial
consideration for sale of
Air Response - - (345,921) (1) (2,399) - -
Net loss - - - - - - -
Unrealized gain on investment
in equity securities - - - - - - 1
Comprehensive loss - - - - - - -
------- ------- ---------- ------- ---------- --------- ----------
Balance - December 31, 2000 - - 64,775,282 162 120,224 (3,903) 1
TOTAL
ACCUMULATED STOCKHOLDERS
DEFICIT EQUITY
----------- ------------
Balance - December 31, 1998 $ (27,644) $ 10,496
Repurchase of preferred stock - (216)
Common stock and
warrants issued for
Acquisitions - 14,430
Conversion of debentures - 5,248
Common stock issued for
services and interest expense 560
Common stock received as
consideration for sale of
Subsidiary - (2,804)
Common stock issued upon
exercise of stock options
and warrants - 2,091
Interest-beneficial conversion
feature - 8,572
Fair market value of detachable
warrants issued with
subordinated debentures - 9,034
Common stock issued to
repay long-term debt - 71
Common shares issued to
settle lawsuit - 152
Common stock issued through
employee stock purchase plan - 28
Unrealized loss on investment
in equity securities - (1,768)
Net loss (10,808) (10,808)
--------------------------
Comprehensive loss (12,576)
=========
Common shares returned upon
employee separation - (290)
------------ ---------
Balance - December 31, 1999 (38,452) 34,796
Common stock returned by
officers to repay stock
subscription receivable -
Conversion of debentures - 16,174
Reclass of deferred financing
costs upon conversion of
debentures - (6,174)
Common stock issued under
earn out arrangement - 332
Exercise of warrants and stock
options - cash - 5,093
Common stock issued in
exchange for stock
subscription receivable - -
Exercise of warrants and stock
options - non-cash - -
Common stock issued for
services rendered - 141
Common stock received on
payoff of note - (163)
Shares issued to settle lawsuit - 159
Common stock issued to
repay long-term debt - 607
Sale of common stock - 27,494
Fair market value of warrants
issued for consulting services - 368
Write-off of investment in
Westmark Group Holdings - 1,768
Common stock issued to
purchase domain name - 101
Repurchase of common shares - (344)
Common stock issued under
employee stock purchase plan - 79
Shares returned as partial
consideration for sale of
Air Response - (2,400)
Net loss (28,698) (28,698)
Unrealized gain on investment
in equity securities - 1
--------------------------
Comprehensive loss (28,697)
------------ =========
Balance - December 31, 2000 (67,150) 49,334
See Notes to Consolidated Financial Statements.
F-5
CYBERCARE, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
STOCK
CAPITAL IN SUBSCRIPTION
PREFERRED STOCK COMMON STOCK EXCESS OF PAR RECEIVABLE
--------------- ------------ ------------- ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Exercise of stock options
non-cash 82,432 - - -
Common stock received in
repayment of stock
subscription receivable - - (22,048) - (65) 63
Common stock issued for
contract settlement - - 125,000 - 152 -
Exercise of warrants and stock
options - cash - - 1,751,470 4 1,506 -
Common stock issued in
exchange for stock
subscription receivable - - 825,000 2 898 (900)
Common stock issued for
services rendered - - 114,768 1 146 -
Common stock issued for
prepaid marketing fee - - 181,818 - 200 -
Common stock issued for
accrued interest - - 92,456 - 366 -
Common stock issued for
interest expense - - 193,729 1 287 -
Common stock received on
repayment of note receivable - - (185,000) (299)
Common stock issued to settle
lawsuit - - 33,060 - 125 -
Fair market value of warrants
issued for consulting services - - - - 780 -
Fair market value of
detachable warrants issued
with debentures - - - - 2,422 -
Common stock issued to
purchase domain name - - 6,240 - 15 -
Common stock issued under
employee stock purchase plan - - 64,484 - 79 -
Common stock issued under
retirement plan - - 29,301 - 61 -
Common stock received as
partial consideration for sale
of business - - (240,000) - (805) -
Stock option valuation
adjustment from related
party - - - - 729 -
Interest - beneficial conversion
feature on convertible
debentures - - - - 234 -
Net loss - - - - - -
Realized gain on marketable
securities - - - - - -
Comprehensive loss - - - - - -
--------- --------- ---------- --------- --------- ---------
Balance - December 31,2001 - $ - 67,827,992 $ 170 $ 127,055 $(4,740)
========= ========= ========== ========= ========= =========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS `
INCOME (LOSS) DEFICIT EQUITY
------------ SHARES AMOUNT
------ -------
Exercise of stock options
non-cash - - -
Common stock received in
repayment of stock
subscription receivable - - (2)
Common stock issued for
contract settlement - - 152
Exercise of warrants and stock
options - cash - - 1,510
Common stock issued in
exchange for stock
subscription receivable - - -
Common stock issued for
services rendered - - 147
Common stock issued for
prepaid marketing fee - - 200
Common stock issued for
accrued interest - - 366
Common stock issued for
interest expense - - 288
Common stock received on
repayment of note receivable - - (299)
Common stock issued to settle
lawsuit - - 125
Fair market value of warrants
issued for consulting services - - 780
Fair market value of
detachable warrants issued
with debentures - - 2,422
Common stock issued to
purchase domain name - - 15
Common stock issued under
employee stock purchase plan - - 79
Common stock issued under
retirement plan - - 61
Common stock received as
partial consideration for sale
of business - - (805)
Stock option valuation
adjustment from related
party - - 729
Interest - beneficial conversion
feature on convertible
debentures - - 234
Net loss - (44,916) (44,916)
Realized gain on marketable
securities (1) - (1)
-------------------------
Comprehensive loss (44,917)
--------- ------------ =========
Balance - December 31, 2001 $ - $ (112,066) $ 10,419
========= ============ =========
See Notes to Consolidated Financial Statements.
F-6
CYBERCARE, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
---- ---- ----
Cash Flows from Operating Activities:
Net loss $(44,916) $(28,698) $(10,808)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 656 398 221
Amortization 1,569 1,586 601
Provision for doubtful accounts 2,876 2,749 30
Reserve for excess and obsolete inventory 2,364 - -
Inventory used for R&D activities 2,536 - -
Write-off of investment in securities - 2,425 -
Amortization of beneficial conversion feature and discount 546 657 8,572
Gain on sale of investments - - (170)
Common stock issued for services and interest expense 435 509 560
Common stock issued to settle lawsuits 152 159 -
Warrants issued in exchange for services 780 - -
Stock option valuation adjustment from related party 729 - -
Net liabilities of discontinued operations 410 (1,016) (335)
Net assets of discontinued operations (2,652) (3,149) (1,752)
(Gain) loss on sale of subsidiary (92) 1,323 (1,256)
Estimated loss on disposal of discontinued operations 11,225 2,362 690
Changes in operating assets and liabilities, net of effects of
acquisitions and dispositions:
Trade accounts receivable (4,189) (3,496) (894)
Inventories (2,258) (4,949) (125)
Notes receivable and other current assets (615) 168 227
Accounts payable 146 1,840 (1,280)
Accrued and other current liabilities 3,150 2,543 (908)
-------- -------- --------
Net cash used in operating activities (27,148) (24,589) (6,627)
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of marketable securities (2,011) (15,561) -
Proceeds from sale of marketable securities 3,511 14,062 -
Restricted cash (373) - -
Capital expenditures, net (532) (879) (667)
Cash paid for deferred costs - - (2,806)
Proceeds from sale of subsidiary - 375 352
Repayments from (advances to) related parties, net 1,109 (2,698) (82)
Change in intangibles, notes receivable and other assets 635 (2,656) (397)
Proceeds from sale of investment in securities - - 61
Cash (transferred to) received from dispositions and acquisitions, net - (1,229) 97
-------- -------- --------
Net cash provided by (used in) investing activities 2,339 (8,586) (3,442)
-------- -------- --------
Cash Flows from Financing Activities:
Other liabilities (299) (60) (410)
Common stock issued through employee stock purchase plan 79 79 28
Net borrowings (repayments) under lines of credit (1,019) 146 637
Proceeds from exercise of stock options and warrants 1,510 5,093 2,091
Proceeds from sale of common stock - 27,494 -
Repurchase of common shares - (344) -
Proceeds of (repayment from) subordinated debentures - (368) -
Proceeds from sale of convertible debentures 10,000 4,667 18,723
-------- -------- --------
Net cash provided by financing activities 10,271 36,707 21,069
-------- -------- --------
Net change in cash and cash equivalents (14,538) 3,532 11,000
Cash and cash equivalents at beginning of year 15,231 11,699 699
-------- -------- --------
Cash and cash equivalents at end of year $ 693 $ 15,231 $ 11,699
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 702 $ 1,146 $ 2,136
======== ======== ========
See Notes to Consolidated Financial Statements.
F-7
CYBERCARE, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental disclosures of non-cash investing 2001 2000 1999
and financing activities: ---- ---- ----
Common stock received inrepayment of stock
subscription receivable and accrued interest $ (65) $ - $ -
Common stock matching contribution issued to retirement plan 61 - -
Common stock issued to settle lawsuit 125 - -
Common stock issued for payment of long term debt - 607 71
Common stock issued for accrued interest 366 - -
Common stock issued in exchange for stock
subscription receivable 900 886 3,605
Conversion of debentures to common stock - 16,174 5,248
Reclass of deferred financing costs upon
conversion of debentures - 6,174 -
Fair market value of detachable warrants issued
with convertible subordinated debentures 2,422 - 9,034
Beneficial conversion feature on convertible debentures 234 - -
Common stock issued under earn-out arrangement - 332 -
Common stock received as partial consideration
for sale of business (805) (2,400) (2,804)
Common stock received on repayment of
related party note receivable (299) (163) -
Common stock issued in exchange for goods and services 215 101 1
Property and equipment purchases financed by other liabilities 568 - -
See Notes to Consolidated Financial Statements
F-8
CYBERCARE, INC. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Supplemental disclosures of non-cash investing and financing activities
(continued):
The following is a summary of the significant non-cash amounts that resulted
from the Company's acquisitions and dispositions:
Year ended December 31,
2001 2000 1999
---- ---- ----
Assets (disposed) acquired:
Accounts receivable, net $ (196) $ (1,897) $ 125
Property and equipment, net (76) (94) 395
Goodwill, net (412) (30) 218
Licenses, net - - 12,987
Other assets - (1,736) 135
-------- -------- --------
Assets (disposed) acquired (684) (3,757) 13,860
-------- -------- --------
Liabilities (transferred) assumed:
Accounts payable (64) (57) 1,420
Accrued expenses and short-term debt (20) (3,386) 756
Long-term debt - (375) 251
-------- -------- --------
Liabilities (transferred) assumed (84) (3,818) 2,427
-------- -------- --------
Fair value of common stock and warrants (issued) transferred (600) (1,168) 11,530
-------- -------- --------
Cash (transferred to) received from dispositions and acquisitions $ - $ (1,229) $ 97
======== ======== ========
See Notes to Consolidated Financial Statements.
F-9
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
CyberCare, Inc. ("CyberCare" or the "Company") is a holding company
which is comprised of a healthcare software technology solutions business; a
physical therapy and rehabilitation business; and a pharmacy business. The
physical therapy and rehabilitation business comprises 42 clinics in the
state of Florida. The pharmacy supports approximately 4,000 patients in about
84 assisted living centers in Florida and is licensed for mail order
distribution across all fifty states. The technology business is intended to
improve the delivery of care through its patented technology and intellectual
property. Our technologies segment offerings include cost effective, patient
centric, network, point to point, mobile and internet based ASP applications
to create an interactive community incorporating all members of the care team
in the healthcare delivery process. Utilizing patented technology for remote
monitoring and real-time interactive communications, applications focus on
the chronically ill, wellness management, physician oversight and wound care.
GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements, the Company incurred a net loss for 2001 of
$44,916, negative cash flow from operations of $27,148 and a working capital
deficiency of $2,156 at December 31, 2001. These factors, among others, may
indicate that the Company will be unable to continue as a going concern for a
reasonable period of time.
The consolidated financial statements do not include any adjustments relating to
the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations, to obtain additional
financing, and ultimately, to attain successful operations. There can be no
assurances that such capital will be available to the Company on acceptable
terms, or at all.
In addition, on April 12, 2002, the Company entered into an agreement with
accredited investors for an additional $10,000 - $15,000 of capital. Funding
of this amount is contingent upon the Company achieving certain milestones.
There can be no assurances that the Company will achieve these milestones.
Management is also continuing to assess the Company's operating structure for
the purpose of further reducing ongoing expenses, increasing sources of
revenue and seeking additional funding.
F-10
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FUTURE CAPITAL NEEDS
For the year ended December 31, 2001, the Company incurred significant
operating losses and a cash flow deficiency. The Company expects to incur
additional losses in 2002 as it carries out its business strategy of
marketing its EHC family of products and system. The Company may raise funds
through the sale of non-tele-health assets, and plans to reduce discretionary
spending and obtain additional equity or debt financing. There is no
assurance that the Company will be able to raise the necessary funds.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the activity of
CyberCare, Inc. and its wholly-owned and majority-owned subsidiaries. All
inter-company transactions and balances have been eliminated in consolidation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting and Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets".
SFAS 141 requires that all business combinations initiated after June 30, 2001
be accounted for under a single method - the purchase method. Use of the
pooling-of-interests method is no longer permitted. SFAS 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment upon initial adoption of the Statement and on an annual basis going
forward. The amortization of goodwill will cease upon adoption of SFAS 142. The
provisions of SFAS 142 will be effective for fiscal years beginning after
December 15, 2001. The Company is required to adopt SFAS 142 in the first
quarter of fiscal year 2002. The Company believes that the adoption of these
standards will have no material impact on its financial statements or results of
operations except for elimination of amortization of Goodwill of approximately
$290 per year.
SOFTWARE DEVELOPMENT COSTS
The Company follows SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
TO BE SOLD, LEASED OR OTHERWISE MARKETED in accounting for costs incurred to
develop the software included in certain of its product offerings. Through
December 31, 2001, such costs have been expensed as incurred and are included in
research and development in the accompanying consolidated statements of
operations.
F-11
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include investments in highly-liquid debt instruments
with original maturities of three months or less. At December 31, 2001 and 2000,
the Company had cash equivalents and short-term marketable security balances in
major financial institutions that exceed federal deposit insurance limits. These
financial institutions have strong credit ratings and management believes that
credit risk related to these deposits is minimal.
CASH - RESTRICTED
Cash-restricted includes cash that is restricted as a result of certain of the
Company's current obligations and is not available to fund operations. At
December 31, 2001 and 2000, the Company had cash - restricted of $373 and $0,
respectively.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
the first in, first out method. Provisions, when required, are made to reduce or
increase excess and obsolete inventories to their estimated net realizable
value. Finished goods and work in process inventories include material, labor
and manufacturing overhead costs. Inventories consist of the following at
December 31:
2001 2000
---- ----
Component parts $1,616 $1,790
Work-in-process 29 541
Finished goods 954 2,911
------ ------
$2,599 $5,242
====== ======
F-12
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Included in finished goods as of December 31, 2001 is $841 of inventory that
has been shipped to but not installed and accepted by customers. Of this
amount, approximately $702 is recorded as deferred revenue as it did not meet
the revenue recognition criteria of Staff Accounting Bulletin (SAB) No. 101,
while the remainder of deferred revenue at December 31, 2001 relates to
deferred network fees.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. The
estimated lives of the Company's property and equipment range from five to seven
years. Property and equipment consist of the following at December 31:
2001 2000
---- ----
Furniture and office equipment $2,885 $2,070
Medical, manufacturing and computer equipment 726 683
Property and improvements 227 133
------ ------
3,838 2,886
Less accumulated depreciation (1,399) (814)
------ ------
$2,439 $2,072
====== ======
GOODWILL
Goodwill is amortized on a straight-line basis over estimated useful lives and
consists of the following at December 31:
Straight-Line
Amortization
Period (Years) 2001 2000
-------------- ---- ----
Goodwill 5-25 $ 5,792 $ 6,455
Less accumulated amortization (707) (695)
--------- ----------
$ 5,085 $ 5,760
========= ==========
F-13
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LICENSES
Licenses consist of healthcare technology licenses and are amortized on a
straight-line basis over estimated useful lives. Licenses consist of the
following at December 31:
Straight-Line
Amortization
Period (Years) 2001 2000
-------------- ---- ----
Healthcare technology licenses 10 12,860 12,860
Less accumulated amortization (2,868) (1,578)
-------- -------
$ 9,992 $11,282
======== =======
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, long-lived assets, including goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets is measured by
comparison of the carrying amount of the assets to net future undiscounted cash
flows expected to be generated from the assets. No impairment has been
recognized in the accompanying consolidated financial statements.
MARKETABLE SECURITIES
The Company's marketable securities are considered "available for sale" and, as
such, are stated at market value. Net unrealized gains and losses on marketable
securities are reported as part of accumulated other comprehensive income in the
accompanying December 31, 2000 consolidated balance sheet. Realized gains or
losses from sale of marketable securities are based on the specific
identification method and included in the accompanying consolidated statement of
operations for the year ended December 31, 2001.
WARRANTY COSTS
Estimated costs related to product warranties are accrued at the time products
are sold.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are expensed as incurred and are included in cost of
services.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
F-14
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NON-RECURRING SEVERANCE AND SETTLEMENT COSTS
During 2001, the Company incurred certain non-recurring expenses relating to
the settlement of certain litigation amounting to approximately $1,158,
severance payments to several former executives amounting to approximately
$780, a charge in the amount of $709 for the fair market value of options to
one of our former executives due to the forgiveness of interest due on a stock
subscription receivable and a $250 cash payment expensed upon termination of a
contract.
INVESTMENT IN SECURITIES
The Company determined that its investment in Westmark Group Holdings was
permanently impaired and, as a result, wrote-off the investment during 2000. The
write-off was recorded as a $2,425 write-off of investment in securities in the
accompanying consolidated statement of operations for the year ended
December 31, 2000.
REVENUE RECOGNITION
The Company generates revenue primarily by providing therapy and related
services, the sale of prescription drugs and, to a lesser extent during 2001 and
2000, the sale of technology equipment and related network access fees. The
Company recognizes revenue when services have been rendered or delivery has
occurred, the price of the product or service is fixed or determinable and
collectiblity is reasonably assured. Additionally, certain of the Company's 2001
technology equipment shipments were made to resellers. Given the fact that a
number of the Company's resellers are still relatively new to the tele-health
marketplace and undercapitalized, certain third and fourth quarter shipments
have been recorded as deferred revenue in the accompanying consolidated balance
sheet as of December 31, 2001 pending installation of and payment for these
units.
The Company bills Medicare and Medicaid for certain of its product sales and
services provided. Medicare and Medicaid reimbursements ("third-party") are
recognized based on allowable charges. The difference between the Company's
established billing rates and contracted or anticipated reimbursement rates is
recorded as a contractual allowance and offset against net revenue. These
revenues are subject to audit and retroactive adjustment by the respective
third-party fiscal intermediaries. Except as disclosed in footnote 5 herein, in
the opinion of management, retroactive adjustments, if any, would not be
material to the financial statements of the Company.
F-15
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Laws and regulations governing the Medicare and Medicaid programs are extremely
complex and subject to interpretation. As a result, it is reasonably possible
that recorded estimates may change by material amounts in subsequent years. The
Company believes that it is in compliance with all applicable laws and
regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing that would have a material adverse
impact on the Company's consolidated financial position or operations other than
those disclosed in footnote 5. While no such regulatory inquiries have been made
other than those disclosed in footnote 5 herein, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare and Medicaid programs. Changes in the Medicare and Medicaid
programs and the reduction of funding levels could have an adverse impact on the
Company.
LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of shares of common stock. Diluted loss per share is determined by
dividing net loss by the weighted average number of shares of common stock and
dilutive common stock equivalents outstanding. Shares of common stock that are
issuable upon the exercise of options and warrants, or upon conversion of
debentures, have been excluded from the 2001, 2000 and 1999 per share
calculations because their effect would have been anti-dilutive. Such shares
amounted to 4,188,424, 9,816,742 and 2,577,221 at December 31, 2001, 2000 and
1999, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2000 and 1999 financial
statements to conform with the 2001 presentation.
FAIR VALUE INFORMATION
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
Cash and cash equivalents, restricted cash, trade accounts receivable and
accounts payable - the carrying amounts approximate fair value because of the
short maturity of those instruments.
F-16
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Marketable securities - marketable securities are carried at fair market value
which is determined by quoted market prices.
Convertible subordinated debentures - the fair value of the Company's
convertible subordinated debentures was approximately $9,574 at December 31,
2001. The fair value of the convertible subordinated debentures was determined
by comparing the fair value of similar issues of debt by other companies as well
as taking into account the interest rate of the debt and the value of the
Company's common stock at December 31, 2001. No debentures were outstanding at
December 31, 2000.
2. ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS
AIR AMBULANCE TRANSPORT ACQUISITION & DISPOSITION - Effective March 1, 1999, the
Company acquired 100% of the outstanding common stock of Air Response North,
Inc. ("Air Response") in exchange for 3,866,667, shares of common stock valued
at $0.75 per share. The $1,015 excess of the purchase price over the fair market
value of the net assets acquired was recognized as goodwill.
Effective September 2, 2000, the Company entered into an agreement (the "ARMT
Agreement") to sell the subsidiaries (which include Air Response) that comprise
its international air ambulance transport segment ("Air") to a former board
member of the Company and to Air Response Medical Transport Corp. ("ARMT") for
$8,500 plus assumption of all debts related to the subsidiaries' operations.
Under the terms of the ARMT Agreement, ARMT paid $2,400 in CyberCare common
stock and issued a $6,100 short-term note bearing interest at 10% (the "ARMT
Note"), which was collateralized by substantially all of the Air assets and
345,921 shares of the Company's common stock held in escrow. ARMT also assumed
all of Air's debt, which aggregated approximately $18,400 on September 2, 2000,
in accordance with the ARMT Agreement. Air revenues aggregated $15,730, $13,780
and $21,055 for the years ended December 31, 2001, 2000 and 1999, respectively.
F-17
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
2. ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS (continued)
The Company expected that the sale of Air to ARMT would have been completed by
September 2001. Due to unprofitable operations and the inability of ARMT to
raise sufficient capital, ARMT ultimately defaulted on the ARMT Note on
October 1, 2001, upon which, the Company gained control of ARMT (and the
operating subsidiaries), and thus regained control of Air. Also, the Company
retained all CyberCare common shares received as consideration in the original
transaction. Upon notification of default and waiver by the former board member
of any ownership right in ARMT and Air, the Board of Directors again approved
the disposal of Air and the Company began actively searching for a new buyer.
Effective September 30, 2001, the Company entered into an agreement to sell the
operating subsidiaries comprising Air to Global Air Response, an unrelated party
("GAR"). The transaction was not completed because certain guarantees made by
certain of the operating subsidiaries could not be released to the satisfaction
of GAR. Key management personnel of Air, along with certain unrelated third
parties, expressed an interest in acquiring the business under the same terms as
the GAR transaction. In anticipation of this transaction, Air's key management
team setup a corporation ("AIM").
Effective December 3, 2001, the Company entered into a transaction with AIM (the
"AIM Agreement") in which AIM assumed the office/hangar leases on the physical
locations, purchased the existing furniture, fixtures and equipment (except
aircraft) and acquired the corporate telephone numbers, corporate names,
employees and the Federal Aviation Administration ("FAA") 135 Certificate of
Air. The Company retained ownership of the Air aircraft and intends to sell such
aircraft as soon as is practicable. Until the aircraft are sold, the Company
will remain liable for approximately $13,700 of lease agreements owed on the
aircraft. Although the Company intends to sell the aircraft, AIM has agreed to
lease certain of the aircrafts for as long as the Company still owns them, up to
a maximum of 30 months, for use in its business. The Company has the right to
sell any of the leased aircraft at any time to a third party upon providing AIM
a thirty day right-of-first-refusal to match the third party offer following
the Company's receipt of the third party offer. If AIM does
not exercise its right, the Company can consummate the sale of the aircraft to a
third party, after which time the Company would have no further obligation
under its aircraft leases.
F-18
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
2. ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS (continued)
Under the terms of the AIM Agreement, AIM issued a $5,000 promissory note (the
"AIM Note") which bears interest at 6% and is convertible into a 19.9%
dilutable, non-voting interest in AIM. Repayment of the AIM Note, including
interest, is contingent upon AIM obtaining agreed upon levels of net
distributable profits (as defined) of the business. Due to the uncertainty
surrounding collection of such payments, the Company has fully reserved the AIM
Note and included the amount in the calculation of the "Estimated loss on
disposal of discontinued businesses" in the accompanying consolidated statement
of operations for the year ended December 31, 2001. Also, included in the 2001
"Estimated loss on disposal of discontinued businesses" is a write-off of all
amounts owed under the defaulted ARMT Agreement discussed above.
The Company is accounting for Air as a discontinued operation until the Company
sells all of its leased aircraft and is removed from the related lease
guarantees. At December 31, 2001, the Company had a $1,000 accrual for estimated
future operating losses of Air, which is included in the 2001 "Estimated loss on
disposal of discontinued businesses" in the accompanying consolidated statement
of operations.
In addition, the $1,627 and $118 net operating results of Air have been reported
as "Loss from operations of discontinued businesses" in the accompanying
consolidated statements of operations for the years ended December 31, 2000 and
1999, respectively. Also, this segment reported an $11,028 and $870 "Estimated
loss on disposal of discontinued businesses" in the accompanying consolidated
statements of operations for the years ended December 31, 2001 and 2000,
respectively.
During 2000, the Board of Directors of the Company approved a dividend to all
shareholders of record on March 31, 2000 of 5% of the consideration received
from the sale of the air ambulance segment (cash and common stock). As of March
25, 2002, the Company has not paid the dividend.
PHYSICIAN PRACTICE - Effective January 26, 2001, the Company sold certain assets
and related liabilities of its physician practice to a related party in exchange
for the return of 140,000 common shares of the Company owned by the related
party valued at $692. The Company recognized a gain in the amount of $92 on this
transaction.
SOUTHEAST ACQUISITION & DISPOSITION - Effective August 1, 1999, the Company
acquired 100% of the outstanding common stock of Southeast Medical Centers, Inc.
("Southeast") in exchange for consideration that is contingent upon Southeast
achieving certain agreed upon pre-tax profit levels. During 2000, the Company
issued contingent consideration payments of 70,942 shares (valued at $332). The
excess of the liabilities assumed over the fair market value of the net assets
of approximately $162 was recognized as goodwill. Effective January 7, 2002, the
Company disposed of 100% of the stock in the subsidiary to the former owners in
consideration for a $281 note (see footnote 15).
F-19
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
2. ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS (continued)
HELP INNOVATIONS ACQUISITION - Effective November 15, 1999, the Company acquired
certain assets of HELP Innovations, Inc. ("HELP"). In exchange for these assets,
the Company issued 1,334,000, shares of common stock to HELP valued at $2,709,
or $2.03 per share. The $2,396 excess of the purchase price over the fair market
value of the net assets acquired was recognized as healthcare technology
licenses.
CYBERCARE TECHNOLOGIES ACQUISITION - Effective September 1, 1999, the Company
acquired 100% of the outstanding common stock of Cybercare, Inc., a Georgia
Corporation ("Cybercare Technologies"), in exchange for 7,324,996, shares of
common stock valued at $1.12 per share and options to purchase 934,997 shares
of the Company's common stock with a fair value of $554. The $10,472 excess
of the purchase price over the fair market value of the net assets acquired
was recognized as healthcare technology licenses.
By acquiring CyberCare Technologies the Company received Cybercare
Technologies' exclusive worldwide license to manufacture, sell and use the
Electronic HouseCall-Registered Trademark- system throughout the world.
Cybercare Technologies, as licensee, is obligated to pay the licensors
$2,100 over a three-year period for additional research and development and a
4% royalty on all Electronic HouseCall-Registered Trademark-unit sales.
CAROLINA DISPOSITION - The Company originally acquired 100% of the
outstanding common stock of Carolina Rehab, Inc. ("Carolina") on August 1,
1999. Effective October 31, 2000, the Company entered into a comprehensive
settlement agreement to sell Carolina, to Carolina's former owner (the
"Carolina Agreement"). In accordance with the Carolina Agreement, the Company
sold 100% of the stock in Carolina in exchange for $3,600. Upon entering the
Carolina Agreement the Company received $375 in cash and a $3,225 note which
bears interest at 8.0% and is payable over four years. The note is
collateralized by the stock of the former subsidiary and any related entity
of the former owner. The terms of the agreement also call for the waiver of
any contingent consideration that would have been due under the terms of the
original purchase agreement between the Company and former owner. During
2000, the Company recognized a loss on sale of subsidiary of approximately
$1,323 from this transaction.
VALLEY PAIN DISPOSITION - On May 3, 1999, Valley Pain Centers, Inc. ("Valley")
was sold to two former officers of the Company in exchange for the return of
1,598,842 shares of the Company's common stock with a market value of $2,804
($1.75 per share), cash and other consideration of $352 and the repayment of
approximately $300 of liabilities owed by Valley, which resulted in the Company
recognizing a gain of approximately $1,256 during 1999. The Company retired all
1,598,842 shares of the Company's common stock received from the two former
officers.
F-20
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
2. ACQUISITIONS, DISPOSITIONS AND DISCONTINUED OPERATIONS (continued)
MOBILE CARDIAC CATH LABS DISCONTINUED OPERATIONS - During the third quarter of
1999, the Company reviewed the operations of its mobile cardiac cath lab
segment. Due to government regulation changes, the Company determined that it
was in the best interest of its shareholders to discontinue this subsidiary. The
results of this subsidiary have been classified as discontinued operations in
the accompanying financial statements for the years ended December 31, 2001,
2000 and 1999. Net liabilities of the discontinued operations at December 31,
2001 and 2000 consist primarily of trade payables and accrued expenses. The
estimated loss on disposal of this discontinued operation at December 31, 2001,
2000 and 1999 was $197, $1,492 and $690, respectively, and includes a provision
for anticipated future expenses related to the disposal of certain leased
assets. The Company originally anticipated selling these leased assets during
2000; however, it proved difficult to sell them. Therefore, during 2001 and
2000, the Company recorded an additional accrual of $197 and $1,492,
respectively, for the estimated loss on disposal of these assets. Revenues from
these operations were $0, $0 and $694 for the years ended December 31, 2001,
2000 and 1999, respectively, and are included in "Loss from operations of
discontinued businesses" in the accompanying consolidated statements of
operations.
Each of the above acquisitions was accounted for under the purchase method of
accounting. Accordingly, the results of operations of each have been included in
the Company's consolidated statements of operations from their respective dates
of acquisition.
The following unaudited pro forma financial data is presented to illustrate the
estimated effects on the consolidated results of operations as if the Company's
acquisitions and dispositions had occurred as of the beginning of each calendar
year presented after giving effect to certain adjustments, including
amortization of goodwill and related income tax effects. The pro forma financial
information does not purport to be indicative of the results of operations that
would have occurred had the transactions taken place at the beginning of the
periods presented or of future results of operations.
2001 2000
------------ -----------
Net sales $ 18,140 $ 15,157
Net loss (45,054) (24,004)
Net loss per common share - basic and diluted $ (0.69) $ (0.42)
F-21
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
3. LINES OF CREDIT
In 1998, the Company entered into a $1,500 line of credit agreement with a
financing company. During 1999, the financing company increased the amount of
borrowings available under this agreement to $3,500. The line bears interest at
prime plus 2.65% (7.40% and 12.15% at December 31, 2001 and 2000, respectively)
and matured in January 2002, at which time the then-outstanding balance was paid
off. The line was collateralized by accounts receivable from certain of the
Company's subsidiaries. As of December 31, 2001 and 2000, the Company had
outstanding borrowings of $500 and $1,461, respectively, under this agreement.
In 1998, the Company entered into a $1,500 line of credit agreement with a
financial institution. In February 2002, the financial institution increased the
amount of borrowings available under this agreement to $1,900. This line of
credit bears interest at prime plus 2.50% (7.25% and 12.00% at December 31, 2001
and 2000, respectively), was renewed during 2001 and matures on May 31, 2002.
The line is collateralized by accounts receivable from certain of the Company's
subsidiaries. As of December 31, 2001 and 2000, the Company had outstanding
borrowings of $474 and $532, respectively, under this agreement.
4. CONVERTIBLE SUBORDINATED DEBENTURES
Convertible subordinated debentures consist of the following at December 31:
2001 2000
---- ----
May 2001 convertible subordinated debentures, with
interest from 12.75% to 13.75% and maturing in May 2004 $10,000 $ -
Less discount (1,924) -
------- ------
8,076 -
------- ------
Less current maturities - -
------- ------
$ 8,076 $ -
======= ======
F-22
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
4. CONVERTIBLE SUBORDINATED DEBENTURES (continued)
In May 2001, the Company sold an aggregate of $10,000 in convertible
subordinated debentures to three accredited investors ("May 2001 Debentures").
The May 2001 Debentures have a three year term and pay interest quarterly
beginning on August 1, 2001, at rates ranging from 12.75% to 13.75% per annum,
in the aggregate, depending on whether interest is payable in stock or cash.
Beginning in November 2001, these subordinated debentures are convertible into
common stock at a conversion price equal to 90% of the average closing price for
the twenty trading days immediately prior to the date of conversion notice, but
in no event shall the conversion price be less than $3.25 per share. In
addition, the Company issued warrants to purchase up to 2,500,000 shares of
common stock at exercise prices ranging from $3.00 to $5.00. All of the
underlying shares, whether through exercise, conversion of the debt or by way of
interest payments, have registration rights.
The fair value allocated to these warrants was $2,422, or $0.97 per share, and
was recorded as a discount to the May 2001 Debentures. The discount is being
accreted through interest expense over the 36 month life of the underlying
debentures. Also, as noted above, the May 2001 Debentures are convertible at
exercise prices of no less than $3.25 per share. The adjusted conversion price
(calculated as proceeds received less the value allocated to the warrants
divided by $3.25) was less than the trading price of the stock on the commitment
date. As a result, the Company recorded a beneficial conversion feature that is
being accreted through interest expense over the 36 month life of the underlying
debentures. Discount and beneficial conversion accreted during 2001 aggregated
$546, and was recognized in "Interest - beneficial conversion feature" in the
accompanying consolidated statement of operations for the year ended
December 31, 2001.
Also, the Company issued subordinated convertible debentures during the years
1997 through 1999. These debenture offerings aggregated $27,438, of which
$16,196 was outstanding at December 31, 1999. All such outstanding debentures
were converted into common shares during 2000. Common share debenture
conversions aggregated 8,985,941 shares and 7,904,668 shares during 2000 and
1999, respectively, valued at $16,174 and $5,248, respectively. The fair value
of detachable warrants associated with the 1997 - 1999 subordinated convertible
debenture issuances was recorded as a discount to the debentures and accreted
through interest expense over the life of the debentures, which ranged from five
to six years. In certain circumstances, the conversion price was less than the
market value per share of the Company's common stock on the date of issue. As a
result, the Company recorded interest expense related to these beneficial
conversion features of $657 and $8,572 for the years ended December 31, 2000 and
1999, respectively.
F-23
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
5. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is engaged in litigation with various parties regarding
matters of dispute that have arisen in the normal course of business, the
outcome of which the Company cannot predict at this time. In these cases where a
material amount is in dispute and in which either insurance is not available or
where an insurer asserts a defense, the Company believes it has the benefit of
insurance coverage, although there is no assurance that with respect to any
particular dispute for which insurance coverage may be applicable the insurer
will not assert that a defense or exemption to coverage applies or that the
amount of coverage will be sufficient. In those cases where a material amount is
in dispute and in which either insurance is not available or where an insurer
asserts a defense or exemption to coverage, the Company cannot presently
estimate the liability, or predict the impact, if any, that any such litigation
may have on the Company's liquidity or financial condition. The Company
anticipates that there will not be a material impact on its financial condition
or results of operations from the outcomes of these legal actions, except as
discussed in the following paragraphs.
The Company has previously disclosed the 14 purported class action lawsuits that
were filed against CyberCare and certain of its executive officers alleging
violations of federal securities laws. These lawsuits were consolidated into a
single class action lawsuit by the United States District Court for the Southern
District of Florida on November 4, 2000. The Consolidated Amended Complaint
("Complaint") principally alleges that the Company and certain of its officers
and directors made misrepresentations or omissions regarding the development and
future sales forecasts of its Electronic HouseCall-Registered Trademark- system
products and revenues of its pharmacy division. The Complaint seeks unspecified
damages and costs. The Company's motion to dismiss was denied on August 20,
2001. Mediation has been ordered by the court. The Company and its management
believe the Complaint lacks merit and they intend to vigorously defend against
the Complaint. The Company also believes that any liability will be covered
under an insurance policy. The insurer has asserted that an exclusion from
coverage applied, which the Company strongly disputes. The Company and the
insurer are currently involved in discussions to resolve the insurance coverage
issue, but the Company cannot predict the outcome of those discussions. The
Company and its management cannot predict the outcome of this litigation or the
impact that the Complaint, or any other suits, claims, or investigations
relating to the same subject matter, may have on the Company's liquidity or
financial condition. In light of the foregoing, the Company's liability, if any,
in relation to such possible claims cannot be estimated at this time.
F-24
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
5. COMMITMENTS AND CONTINGENCIES (continued)
Our Physical Therapy and Rehabilitation subsidiary ("PT&R") received a letter
from the Center for Medicare and Medicaid Services ("CMS") and its intermediary
in April 2001 notifying it of the suspension of Medicare payments. CMS alleged
that certain patient complaints, which constituted less than 1% of PT&R's
Medicare patients, and other alleged regulatory non-compliance, justified the
payment suspension. During the suspension, the Medicare program continued to
process PT&R's claims, but held payment in escrow. In August 2001, the
suspension was lifted and payment for processed claims was released although
approximately $1,114 remains held in escrow, pending further review. The Company
has learned that CMS has completed its review and a formal determination is
expected shortly, which is anticipated to include a release of the escrowed
amount as offset by an amount for denied claims. The denied claims may be
appealed through the CMS administrative appeal process. As of December 31,
2001, the Company has recorded an allowance for uncollectibles in the amount
of $500 against the balance being held.
A complaint was filed against us on August 13, 2001, alleging that the
Company breached certain obligations in connection with the removal of a
registrictive legend from stock issued to the plaintiff. Mediation was held
in March 2002, which resulted in settlement of the dispute. The settlement
requires the Company to issue shares of common stock equal in value to $200
to the plaintiff, transfer of the Sleep Disorder Center (previously owned by
the plaintiff) back to the plaintiff, and make a cash payment, which the
Company's insurance carrier has agreed to cover, of $200 to the plaintiff.
A complaint was filed against us by IMRglobal (n/k/a CGI Information Technology
Services) on November 21, 2001 in the 6th Judicial Circuit in and for Pinellas
County, Florida, alleging that the Company breached its obligations to make
payment for software development services. The Company believes the complaint is
without merit and intends to vigorously defend against the suit. The Company's
liability, if any, in relation to this claim cannot be estimated at this time.
In February 2002, an arbitration panel determined that the Company is
responsible for approximately $1,200 in damages and attorneys' fees in
connection with the Company's performance under an option agreement. From
inception the Company believed there was no merit to the claim and damages, if
any, were covered under an insurance policy. The insurer has asserted that an
exclusion from coverage applies, which the Company strongly disputes. The
Company and the insurer are currently involved in dispute resolution proceedings
regarding the coverage denial. As of March 26, 2002, the arbitration award had
not been issued.
F-25
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
5. COMMITMENTS AND CONTINGENCIES (continued)
INSURANCE - The Company's operations are insured for medical liabilities and for
professional and general liability on a claims-made basis. The Company evaluates
the liability related to asserted and unasserted claims for reported and
unreported incidents based on facts and circumstances surrounding such claims
and the applicable policy deductible amounts.
LEASES - The Company leases certain of its office space, service facilities and
equipment under operating leases that expire at various times through April
2006. Rent expense for 2001, 2000 and 1999 was approximately $2,345, $1,668 and
$1,012, respectively. Lease commitments at December 31, 2001 under
non-cancelable operating leases with terms exceeding one year are as follows:
Year ending December 31,
-------------------------------
2002 $ 2,001
2003 1,324
2004 1,082
2005 802
2006 230
---------
Total minimum rental commitments $ 5,439
Less sublease rental income (1,014)
---------
Net minimum rental commitments $ 4,425
=========
For the year ended, December 31, 2001, the Company had no material sublease
rental income. The Company had no sublease rental income for the years ended
December 31, 2000 and 1999.
COMMITMENTS - In December, 2001, the Company entered into a 36 month commitment
with International Business Machines Corporation (IBM). The Company will use
several of IBM's offerings including, network infrastructure and management
which allows for video teleconferencing, field service installation and support,
as well as help desk services. Connectivity customized for local requirements
will be provided by IBM business partner Virtela. Under the provisions of the
agreement, the Company's annual commitments primarily consist of connectivity
services, web hosting costs, and installation charges. Minimum commitments over
the term of the agreement are as follows:
Year ending December 31,
-----------------------------
2002 $ 1,090
2003 1,610
2004 1,974
---------
$ 4,674
=========
The Company can terminate this commitment and the termination fees in 2002,
2003, and 2004 are $468, $292 and $167, respectively.
F-26
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
5. COMMITMENTS AND CONTINGENCIES (continued)
EMPLOYMENT AGREEMENTS - The Company has employment agreements with a number of
its executive officers which call for severance payments, continuation of
benefits, and certain other provisions in the event of separation from the
Company.
6. INCOME TAXES
The Company has no current or deferred income tax expense (benefit) in 2001 or
2000, because the Company experienced significant losses in both years and a
full valuation allowance was provided for the resulting deferred tax assets.
Deferred income taxes represent the net tax effects of temporary differences in
the recognition of certain items for income tax and financial reporting
purposes. Significant components of the net deferred income tax
assets/liabilities are as follows:
December 31,
------------
2001 2000
---- ----
Deferred tax assets:
Operating loss carryforwards $ 24,701 $ 13,275
Allowance accounts 1,720 1,900
Accrued expenses 5,246 1,144
Other 655 227
---------- ----------
Total gross deferred tax assets 32,322 16,546
Less valuation allowance (30,391) (14,873)
---------- ----------
Net deferred tax assets 1,931 1,673
Deferred tax liabilities:
Other 18 30
Depreciation and amortization 1,913 1,643
---------- ----------
Total deferred tax liabilities 1,931 1,673
---------- ----------
Total net deferred taxes $ - $ -
========== ==========
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
F-27
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
6. INCOME TAXES (continued)
The Company has established a valuation allowance of $30,391 (compared with
$14,873 in the prior year) related to the utilization of its deferred tax assets
because of uncertainties that preclude it from determining that it is more
likely than not that it will be able to generate taxable income to realize such
asset during the operating loss carryforward period, which begins to expire in
2008. Such uncertainties include recent cumulative losses by the Company,
extensive laws and regulations within the healthcare industry that could impair
our ability to conduct business, risks associated with the integration of
acquisitions, our ability to protect our patents and proprietary technology and
the nature of our long sales cycle and the fact that it may be disruptive to our
customers' existing business.
At December 31, 2001, the Company has available net operating loss carryforwards
of $59,091 that expire beginning in 2008. However, the Company has experienced
several changes in ownership as defined by Internal Revenue Code Section 382.
The effect of the changes of ownership has limited the Company's net operating
loss carryforwards (NOL) from $75,121 to $59,091. This reduction of the NOL of
$16,030 is comprised of a permanent limitation of $9,479 due to the expiration
of the NOL's and an annual limitation of $6,551 that will begin to expire in
2008.
The significant elements contributing to the difference between the federal
statutory rate and the Company's effective tax rate are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---- ----
Federal statutory rate (34.00)% (34.00)%
State taxes, net of federal benefit (3.63) (3.63)
Non-deductible items 1.90 3.86
Change in valuation allowance 34.94 29.08
Other 0.79 4.69
------- ------
0.00% 0.00%
======= ======
F-28
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
7. STOCK COMPENSATION PLANS
The Company has four plans under which it has issued stock options:
1996 Stock Option Plan An aggregate of 5,000,000 shares of common stock
for Officers & Directors are reserved for issuance. Stock options are not
currently being issued under this plan.
1996 Employee Stock An aggregate of 1,000,000 shares of common stock
Option Plan are reserved for issuance. Stock options are
not currently being issued under this plan.
1999 Directors and An aggregate of 12,000,000 shares of common
Executive Officers Stock stock are reserved for issuance as amended. As
Option Plan of December 31, 2001 and 2000, 1,741,250 and
3,303,750 shares, respectively, remained
available for issuance under this plan.
1999 Incentive Stock An aggregate of 8,000,000 shares of common
Option Plan stock are reserved for issuance as amended. As
of December 31, 2001 and 2000, 4,361,657 and
2,933,100 shares, respectively, remained
available for issuance under this plan.
The Compensation Committee of the Company's Board of Directors administers and
interprets the Company's Stock compensation plans and is authorized to grant
options to eligible participants. Options issued under these plans generally
vest over a three-year period and expire five years from the original grant
date. The following table sets forth options granted, canceled, forfeited and
outstanding:
Weighted Average
Option Price Exercise Price
Options Per Share Per Share
------- --------- ---------
Outstanding, at December 1998 3,752 $ 0.50 - $ 20.00 $ 1.28
Granted 5,134 0.75 - 5.06 1.42
Exercised (3,135) 1.00 - 1.50 1.15
Forfeited (100) 1.25 - 1.25 1.25
------ ----------------- ------
Outstanding, at December 1999 5,651 0.50 - 20.00 1.46
Granted 5,202 1.48 - 16.31 4.77
Exercised (808) 0.50 - 2.25 1.22
Forfeited (432) 1.00 - 20.00 5.43
------ ----------------- ------
Outstanding, at December 31, 2000 9,613 0.50 - 16.31 3.02
Granted 7,906 0.75 - 12.00 1.70
Exercised (181) 1.22 - 2.25 1.41
Forfeited (2,310) 0.75 - 15.13 3.64
------ ----------------- ------
Outstanding, at December 31, 2001 15,028 0.50 - 16.31 2.30
======
Exercisable at December 31, 2001 8,151 0.50 - 16.31 2.48
======
Exercisable at December 31, 2000 4,280 0.50 - 14.31 2.31
======
Exercisable at December 31, 1999 2,260 $ 0.50 - $ 16.31 $ 1.45
======
The weighted-average grant-date fair value of options granted during 2001, 2000
and 1999 was $1.46, $4.41 and $1.03 per share, respectively.
F-29
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
7. STOCK COMPENSATION PLANS (continued)
The Company applies Accounting Principles Board Opinion ("APB") No. 25 and
related Interpretations in accounting for its stock option and purchase plans.
Compensation cost is calculated as the difference between the exercise price of
the option and the market value of the Company's stock at the date the option
was granted.
The exercise price of all options granted by the Company to employees equaled
the market price at the date of grant. Accordingly, the Company has not
recognized any compensation expense for its stock option plans. Had compensation
cost for the Company's stock option plans been determined based on the grant
date fair value consistent with the method prescribed in SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below.
2001 2000 1999
---- ---- ----
Pro forma net loss $ (55,899) $ (43,946) $ (13,138)
============ =========== ===========
Pro forma net loss per common share - basic
and diluted:
Loss from continuing operations $ (0.68) $ (0.65) $ (0.37)
Discontinued operations (0.17) (0.07) (0.03)
------------ ------------- -----------
Net loss $ (0.85) $ (0.72) $ (0.40)
============ ============ ===========
The above pro forma disclosures may not be representative of the effects on
reported net operations for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions.
2001 2000 1999
---- ---- ----
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 137.99% 140.49% 140.28%
Risk-free interest rate 1.72% 5.00% 5.00%
Expected life 4.40 years 4.15 years 4.84 years
During September 1999, certain executive officers exercised stock options
totaling 3,135,334 shares at exercise prices varying from $1.00 to $1.50. In
lieu of cash, each of the officers delivered a non-recourse promissory note in
favor of the Company, which bears interest at the applicable federal rate and
matures on September 23, 2004. Each of the notes is collateralized by the shares
exercised by the applicable officer and the interest is recourse.
F-30
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
7. STOCK COMPENSATION PLANS (continued)
Effective September 10, 2001, the Company entered into a Separation and
Severance Agreement with one of these executive officers. As part of his
severance agreement, the Company agreed to forgive approximately $148 of
interest due on his loan.
As a result of the forgiveness, the Company recorded an expense in the amount of
$709 based on the fair market value of the Company's common stock at the date
the interest was forgiven. This amount has been expensed in its entirety in the
year ended December 31, 2001.
The following information applies to options outstanding at December 31, 2001:
Weighted Weighted Average
Range of Options Average Remaining Options Weighted Average
Exercise Price Outstanding Exercise Price Contractual Life Exercisable Exercise Price
-------------- ----------- -------------- ---------------- ----------- --------------
(In thousands) (years) (In thousands)
under $0.51 350 $ 0.50 2.6 350 $ 0.50
$ 0.51 - $ 1.00 4,712 0.83 3.8 1,830 0.92
$ 1.01 - $ 2.00 3,364 1.48 3.5 2,204 1.46
$ 2.01 - $ 3.00 2,844 2.58 3.7 1,335 2.55
$ 3.01 - $ 4.00 679 3.93 3.2 427 3.98
$ 4.01 - $ 5.00 2,479 4.75 3.2 1,604 4.77
$ 5.01 - $10.00 574 5.71 2.4 378 5.57
$10.01 - $20.00 26 13.59 2.0 23 13.20
------ -----
15,028 8,151
====== =====
8. WARRANTS
During 2001 and 2000, the Company granted 9,035 and 600 warrants, respectively.
During 2001 the Company granted 5,935 warrants for services and 3,100 to acquire
common stock of the Company as part of the private placements discussed in Notes
4 and 11. Each warrant represents the right to purchase one share of common
stock at prices ranging from $0.85 to $6.95 per warrant. There are 8,575
warrants outstanding at December 31, 2001, all of which were exercisable, with
expiration dates through March 2010. The weighted average exercise price of
warrants outstanding at December 31, 2001 is $4.32 per share.
During 2001, the Company issued warrants to purchase up to 5,935 shares of the
Company's common stock to several un-related parties in lieu of cash payments
for services rendered and other amounts due. The Company has recorded $780 as
the fair value of the warrants issued.
The weighted-average grant-date fair value of warrants granted during 2001, 2000
and 1999 was $1.22, $16.47 and $1.59 per share, respectively, and was computed
using the Black-Scholes option pricing model and the same weighted average
assumptions disclosed in footnote 7.
F-31
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
9. EMPLOYEE RETIREMENT PLANS
Effective January 1, 2000, the Company began sponsoring and contributing to a
qualified, defined contribution Retirement Savings Plan covering substantially
all employees. The Cyber-Care, Inc. Retirement Savings Plan was established
pursuant to Section 401(k) of the Internal Revenue Code. Under the terms of the
plan, covered employees are allowed to contribute up to 15% of their pay,
limited to the yearly maximum allowed by the Internal Revenue Service. The
Company match is equal to 50% of employee contributions, subject to a maximum of
4% of an employee's pay, is funded in Company common stock and vests ratably
over five years. The Company match consisted of 106,389 common shares,
contributed in 2002, and 29,301 common shares, contributed in 2000, (valued at
$102 and $61) for the years ended December 31, 2001 and 2000, respectively.
10. EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan (the "Stock Purchase Plan")
allows qualified employees (as defined) to purchase designated shares of the
Company's common stock in an amount not to exceed 15% of their annual
compensation. Shares acquired through the Stock Purchase Plan are purchased at a
price equal to the lower of 85% of the closing price of the Company's common
stock at the beginning or end of each semi-annual stock purchase period. The
Company issued 64,484, 10,334 and 6,239 shares of common stock (valued at $79,
$79 and $28) during the years 2001, 2000 and 1999, respectively, pursuant to
this plan.
11. ISSUANCES AND REPURCHASES OF COMMON AND PREFERRED STOCK
On February 28, 2000, the Company received approximately $11,000, less
underwriters' fees of $1,000, by selling 500,000 shares of the Company's common
stock at $22.00 per share. The Company also issued warrants to purchase up to
100,000 additional common shares at an exercise price of $31.50 per share.
On April 10, 2000, the Company received approximately $20,000, less underwriters
fees of $2,506, by selling 1,295,546 shares of the Company's common stock at
$15.44 per share. The Company also issued warrants to purchase up to 500,000
additional common shares at an exercise price of $18.44 per share.
The Company has 20,000,000 shares of preferred stock authorized, and 19,800,000
shares of preferred stock available for issuance, that may be used in one or
more series as determined by the board of directors of the Company. In partial
payment on the sale of shares of Westmark common stock, the Company received
$273 and 200,000 shares of previously issued preferred stock held by Westmark.
Upon receipt in 1999, such shares were retired.
F-32
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
12. RELATED PARTY TRANSACTIONS
As of December 31, 2001 and 2000, short-term notes receivable from related
parties were $832 and $2,280, respectively, of which $604 and $0 was reserved,
respectively. Notes receivable from related parties were collateralized by
560,530 and 1,922,678 shares of the Company's common stock at December 31, 2001
and 2000, respectively. The Company received notes from each individual that
bear interest at rates ranging from 7% to 10%. Through February 28, 2002, $31 of
the short-term notes had been repaid. The Company recognized interest income of
$70 and $74 from these related party notes for the years ended December 31, 2001
and 2000, respectively. In addition, the Company's former President resigned on
September 10, 2001 and as part of his severance, $149 of such interest was
written-off against an accrual for bonuses (that will not be paid). Also,
another of the Company's executives paid off his short-term note during 2001 and
$31 of accrued interest was written-off against interest income in the
accompanying consolidated statement of operations for the year ended December
31, 2001.
During both 2001 and 2000, certain officers, directors, employees and
non-employees exercised stock options to acquire 825,000 shares and 470,248
shares, respectively, at exercise prices of $1.09 per share in 2001 and ranging
from $0.50 to $2.25 per share in 2000. In conjunction with these exercises, the
Company received interest-bearing notes (at rates from 4.8% to 10.0% and from
7.0% to 10.0% at December 31, 2001 and 2000, respectively) from each officer,
director, employee and non-employee. These notes aggregated $4,740 and $3,903 at
December 31, 2001 and 2000, respectively, and are included in stockholders'
equity as part of stock subscription receivable in the accompanying consolidated
balance sheets. The Company had accrued interest receivable of $504 and $282
related to these stock subscriptions as of December 31, 2001 and 2000,
respectively.
During 2001, two executive officers resigned from the Company. Upon their
termination, the Company entered into a Separation and Settlement Agreement with
each former executive outlining the severance payments and continuation of
benefits for each executive. As of December 31, 2001, the Company has accrued
$513 related to these settlements which is included in accrued liabilities.
F-33
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
13. OPERATING SEGMENTS
The Company is organized and determines its segments based on customer-focused
operating groups. Each group reports its results of operations and makes
requests for capital expenditures and acquisition funding to the Company's chief
operating decision-making group. This group is comprised of the following four
individuals: Chief Executive Officer and President, Executive Vice President,
Chief Financial Officer and Senior Vice President of International. Under this
organizational structure and as discussed further in Footnote 1, the Company's
operating groups have been aggregated into three reportable operating segments:
Pharmacy business whose operations primarily support assisted living and
similar long-term care facilities;
Physical therapy and rehabilitation business focuses on providing
occupational, physical and speech therapy services; and
Technology business focuses on the development and commercialization of
patented products and services used in remote monitoring, care and
communication between patients, caregivers and other people included in the
healthcare continuum.
The Other category presented below includes the corporate office and elimination
of inter-company activities, neither of which meet the requirements of being
classified as an operating segment. As discussed in Note 2, the Company has
entered into an agreement to sell its international air ambulance transport
segment ("Air"). Accordingly, Air is not separately presented below for 2001,
2000 or 1999, but rather is included as part of the Other category because the
Company is accounting for this disposition as a discontinued operation.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting principles described in Note
1. The Company evaluates the performance of its reportable operating segments
based primarily on net revenues, (loss) income from continuing operations before
special costs and charges (such as beneficial conversion feature interest,
(loss) gain on sale of subsidiary and write-off of investment in securities) and
working capital.
F-34
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
13. OPERATING SEGMENTS (continued)
Segment information for the years 2001, 2000 and 1999 is as follows:
Physical Therapy
Technology and Rehabilitation Pharmacy Other Consolidated
---------- ------------------ -------- ----- ------------
2001
----
Net sales $ 1,561 $ 10,437 $ 6,243 $ - $ 18,241
(Loss) income from
continuing operations (28,501) (257) (566) (4,367) (33,691)
(Loss) income from continuing
operations, before
special costs and charges (28,501) (257) (566) (3,913) (33,237)
Working capital (deficit) (823) 1,342 (1,106) (1,569) (2,156)
Total assets 16,312 5,472 2,258 7,187 31,229
2000
----
Net sales 988 11,984 6,348 - 19,320
Loss from continuing
operations (20,362) (243) (591) (3,513) (24,709)
(Loss) income from continuing
operations, before
special costs and charges (20,362) (243) (591) 892 (20,304)
Working capital (deficit) 3,735 72 (121) 23,268 26,954
Total assets 23,220 4,956 2,141 29,416 59,733
1999
----
Net sales 1,558 9,377 4,709 1,200 16,844
(Loss) income from
continuing operations (3,863) 792 (4) (6,925) (10,000)
(Loss) income from continuing
operations, before
special costs and charges (3,863) 792 (4) 391 (2,684)
Working capital (deficit) (3,627) 757 412 26,312 23,854
Total assets $ 14,959 $ 6,336 $ 1,913 $ 33,906 $ 57,114
The Company operated principally in the United States and no one customer
accounted for greater than 10% of revenue from operations during the years ended
December 31, 2001, 2000 and 1999.
F-35
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
14. SELECTED QUARTERLY DATA (unaudited)
Summarized quarterly data for the years ending December 31, 2001 and 2000 are as
follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2001
----
Net sales $ 4,244 $ 4,704 $ 5,195 $ 4,098
Operating loss from
continuing operations (5,025) (6,954) (6,405) (15,307)
Net loss (5,025) (7,904) (8,299) (23,688)
Basic and diluted net loss
per common share $ (0.08) $ (0.12) $ (0.13) $ (0.35)
2000
----
Net sales $ 4,890 $ 4,705 $ 4,535 $ 5,190
Operating loss from
continuing operations (2,803) (6,604) (4,012) (11,290)
Net loss (2,788) (7,301) (4,957) (13,652)
Basic and diluted net loss
per common share $ (0.05) $ (0.12) $ (0.08) $ (0.22)
15. SUBSEQUENT EVENTS
The Company originally acquired 100% of the outstanding common stock of
Southeast Medical Centers, Inc. ("Southeast") effective August 1, 1999.
Effective January 7, 2002, the Company entered into a comprehensive
settlement agreement to sell Southeast to Southeast's former owners (the
"Southeast Agreement"). Under the terms of the Southeast Agreement, the
Company sold 100% of the stock in the subsidiary in exchange for a $281 note
which bears interest at 8.0% and is payable over three years. The note is
collateralized by the stock of the former subsidiary. The terms of the
agreement also call for the waiver of any contingent consideration that would
have been due under the terms of the original purchase agreement between the
Company and former owners. The Company will recognize a loss on sale of
subsidiary of approximately $513 from this transaction during 2002.
In January 2002, the Company issued an 8% debenture in the amount of $172, which
matures on April 23, 2002. The debenture is collateralized by a pledge of
400,000 of the Company's common shares owned by a former officer and director.
In January 2002, the Company received $900 (less fees of $100) for working
capital purposes and signed a $1,000 60-day promissory note dated as of January
22, 2002 with Dynamic Holdings Corporation (the "Note"). The Note is due on
March 22, 2002 and interest is due on the unpaid principal balance at the rate
of 8% per annum. If any payment of principal or interest remains unpaid after
the same shall become due, the entire principal sum and accrued interest thereon
shall forthwith become immediately due and payable at the option of Dynamic
Holdings or its designees and, without further notice, the Company expressly
waives notice of such default. While the Note is in default, it shall bear
interest at 18% per annum. The Note is secured by the outstanding balance of
that certain $3,225 promissory note dated October 31, 2000, given by Outreach
Programs, Inc. to the Company in exchange for the sale of 100% of the stock in
Carolina Rehab, Inc.
The Company's former Chairman of the Board and Chief Executive Officer, Michael
Morrell, resigned on February 6, 2002. The Company's Corporate Secretary, Linda
Moore resigned on February 5, 2002. The Company is in the process of determining
what if any amounts are owed under the former employees' employment
agreements, as well as revisiting settlements of previous executives who
resigned from the Company in 2001.
F-36
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
15. SUBSEQUENT EVENTS (continued)
The Nasdaq Stock Market, Inc. ("Nasdaq") has notified the Company that on
February 20, 2002, the price of the Company's common stock had closed for the
previous thirty consecutive trading days below the minimum $1.00 per share
requirement under its Marketplace Rules. Consequently, the Company has at least
until May 21, 2002 to regain compliance or appeal any delisting determination
made by Nasdaq's listing qualifications panel. The Company may also apply for a
transfer of its common stock listing to the Nasdaq SmallCap Market, which has an
extended grace period in which to satisfy the listing requirements for the
Company's securities. If the Company submits a transfer application and pays the
applicable SmallCap Market listing fees by May 21, 2002, initiation of the
delisting proceedings will be stayed pending Nasdaq's review of the application.
If the application is approved, the Company will have until August 19, 2002 to
regain compliance under the Nasdaq Marketplace Rules. An additional 180 day
grace period may be applicable; provided that the Company meets the initial
listing criteria for the SmallCap Market under the Marketplace Rules. The
Company may be eligible to transfer back to the Nasdaq National Market if by
February 17, 2003 it regains compliance in accordance with the Nasdaq
Marketplace Rules. At this time, the Company believes that it qualifies for
initial listing for the SmallCap Market.
In February 2002, the Company entered into an agreement with a hardware
developer and manufacturer for the design, development and the manufacture of a
new EHC platform. The agreement calls for minimum payments of $1,905 and $1,535
in 2002 and 2003 respectively.
In connection with the Marketing, Distribution and License Agreement dated
October 11, 2001 by and among CyberAmericare, Inc. ("CAC") and CyberCare
Technologies, Inc. and CyberCare International Limited, wholly-owned
subsidiaries of CyberCare, Inc. (the "Company"), as amended December 27, 2001
(collectively, the "Agreement"), the parties mutually agreed to terminate the
Agreement prior to the due date for payment by CAC of the geographic exclusivity
fee required under the Agreement. The mutual termination comes as a result of
Jack Hight, CAC's chairman and founder, being appointed as Interim Chairman of
the Board of the Company. Accordingly, the fourth quarter sale of EHC units and
peripherals to CAC - which was previously reported as a 2001 fourth quarter sale
in a press release issued by the Company - has been reversed, as noted in a
subsequent press release. On March 27, 2002, Mr. Hight resigned from his
position of Interim Chairman of the Board.
The Cooperative Development, Services, Licensing and Marketing Agreement between
Health Hero Network, Inc. and the Company made as of September 7, 2001, and
disclosed in a press release on October 4, 2001, was terminated as of January
21, 2002.
F-37
CYBERCARE, INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
15. SUBSEQUENT EVENTS (continued)
The Registrant entered into a Private Equity Line Agreement ("Agreement") dated
as of September 14, 2001 with Strategic Investment Management SA, an entity
organized under the laws of the British Virgin Islands ("SIM"). Under the
Agreement, the Company has the right to require SIM to purchase, from time to
time, the Company's common stock (a "Put"), not to exceed, in the aggregate,
$15,000 of the Company's common stock. On February 28, 2002, this Agreement was
amended and increased from $15,000 to $30,000. The price for each share
purchased pursuant to a Put is 85% of the lower of the closing bid price or the
lowest trading price for the Company's common stock (as reported by Bloomberg,
L.P.) on the trading day on which a Put notification is delivered by the Company
to SIM. The maximum number of shares of common stock the Company is permitted to
Put to SIM in any seven-trading day period is based on 17.5% of the average
daily trading volume (measured over the 10-day period prior to the Put
notification) multiplied by a factor of five. Each Put must be for at least
10,000 shares of the Company's common stock and any "Put" is at the Company's
option.
Through March 22, 2002, the Company delivered one "Put" for 500,000 shares of
the Company's common stock and received proceeds in the amount of $214 from SIM.
The Company is required to consummate minimum Puts of $1,000 of the Company's
common stock during the term of the Agreement. The total number of shares of
common stock which may be owned at any point in time by SIM under the Agreement
may not exceed 19.9% of the total outstanding common shares of the Company. The
Agreement will terminate at the earlier of twenty-four months after the
commencement of the commitment period or the date on which the Company has made
Puts with an aggregate investment amount equal to $30,000.
F-38
CYBERCARE INC. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(In thousands, except share and per share data)
15. SUBSEQUENT EVENTS (continued)
In February 2002, the Company received $228 (less fee of $2) for working
capital purposes and signed a $230 10-day promissory note dated February 25,
2002 with Dynamic Holdings Corporation. The note was due on March 7, 2002 and
interest is due on the unpaid principal balance at the rate of 8% per annum.
If any payment of principal or interest remains unpaid after the due date,
the entire principal sum and accrued interest thereon shall forthwith become
immediately due and payable at the option of Dynamic Holdings or its
designees and, without further notice, the Company expressly waives notice of
such default. The Note is currently in default and bears interest at 18% per
annum. The Note is secured by the outstanding balance of that certain $3,225
promissory note dated October 31, 2000, given by Outreach Programs, Inc. to
the Company in exchange for the sale of 100% of the stock in Carolina Rehab,
Inc.
In March 2002, the Company entered into a term sheet with an accredited investor
(the "Lender") whereby the Company may borrow up to $5,000 in exchange for
senior convertible promissory note(s) (the "Convertible Note"). The Convertible
Note has a 12 month term and requires interest at 10% per annum, increasing to
15% retroactively upon default. At the election of the Lender, both principal
and interest are convertible into the Company's common stock at 85% of the
closing bid price on the day prior to conversion, but in no event less than
$0.30 per share or more than $1.25 per share. In addition, the Company issued
warrants to purchase 250,000 shares of common stock at $0.75 per share,
exercisable within 24 months for each $2,500 funded by the Lender. In addition,
the Company is liable for a commission (payable in cash and warrants) and the
Lender's legal fees in connection with review of the transactional documents and
closing of the transaction. All of the underlying shares, whether through
conversion of the Convertible Note or exercise of the warrants, have
registration rights.
F-39
CYBERCARE, INC. and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
DESCRIPTION PERIOD EXPENSES WRITEOFF'S CHANGES OF PERIOD
----------- ------------ ---------- ---------- ------- --------------
(In thousands)
Allowance for doubtful accounts and
notes receivable - related
parties reduction to realizable value
Year ended December 31, 2001 $ 1,727 $ 2,876 $(2,113) $ (27)(1) $ 2,463
Year ended December 31, 2000 1,127 2,749 (1,774) (375)(1) 1,727
Year ended December 31, 1999 1,001 30 (44) 140 (1) 1,127
Allowance for excess & obsolete
inventories
Year ended December 31, 2001 $ - $ 2,364 $ - $ - $ 2,364
Year ended December 31, 2000 - - - - -
Year ended December 31, 1999 - - - - -
Deferred tax asset valuation allowance
Year ended December 31, 2001 $14,873 $15,518 $ - $ - $ 30,391
Year ended December 31, 2000 6,527 8,346 - - 14,873
Year ended December 31, 1999 6,472 55 - - 6,527
(1) Purchases and sales of subsidiaries.
F-40